TSB Bank plc Annual Report and Accounts 2020TSB Bank plc Annual Report and Accounts 2020 page 4...

TSB Bank plc

Annual Report and Accounts 2020

Registered in Scotland

Company Number: SC095237

TSB Bank plc Annual Report and Accounts 2020 page 1

TSB Bank plc Annual report and consolidated financial statements For the year ended 31 December 2020

Overview TSB Bank plc (the ‘Company’), together with its subsidiary undertakings (together the ‘Bank’ or ‘TSB’) offers a range of

retail and business banking services in the UK. It is the operating subsidiary of its immediate parent, TSB Banking Group

plc, and its ultimate parent company is Banco de Sabadell, S.A.

Contents

Directors and Company Secretary 2

Strategic report 3

Review of business performance 3

Outlook 5

Purpose, business model and key performance indicators 6

Section 172 statement 7

Review of financial performance 9

Principal risks and uncertainties 11

Directors’ report 18

Financial statements 23

Balance sheets 25

Consolidated statement of comprehensive income 26

Statements of changes in equity 27

Cash flow statements 28

Notes to the consolidated financial statements 29

Independent auditors’ report to the members of TSB Bank plc 79

Contacts 87


Directors and Company Secretary The Directors who served during the year or until the date of their resignation or from the date of their appointment are:

Chairman: Richard Meddings (independent on appointment)

Executive Directors: Debbie Crosbie (Chief Executive)

Ralph Coates (Chief Financial Officer)

Independent Non-executive Directors: Paulina Beato

Libby Chambers (appointed 1 October 2020)

Dame Sandra Dawson* (resigned 31 December 2020)

Lynne Peacock* (appointed 22 April 2020) (Senior Independent Director)

Mark Rennison (appointed 1 August 2020)

Graeme Hardie (resigned 16 May 2020)

Stephen Page (resigned 31 October 2020)

Andy Simmonds

Polly Williams

Non-executive Directors: César González-Bueno (appointed 23 March 2020)

Tomás Varela

David Vegara (appointed 22 January 2020)

Company Secretary: Keith Hawkins * Dame Sandra Dawson was Senior Independent Director until her resignation from the Board on 31 December 2020 and was succeeded as Senior Independent Director by Lynne Peacock.

Registered office:

TSB Bank plc

Henry Duncan House

120 George Street

Edinburgh

EH2 4LH


Strategic report Review of business performance

Introduction

A key responsibility of any company is to prepare for, and respond well to, the unexpected. Few could possibly have

foreseen the events that were about to unfold during 2020. TSB has, however, been guided by its new purpose – Money

Confidence. For everyone. Every day – and by the plans that were already underway as part of a three-year growth

strategy, launched in November 2019.

Although TSB’s 2020 results reflect the scale of the financial costs of the pandemic, it is significant that during this

tumultuous year key aspects of trading performance have improved significantly, and that the pace of change within the

business has accelerated rapidly. TSB has balanced a wide range of considerations and made good commercial decisions

in running the bank prudently. In spite of everything, this has been one of the busiest and most productive years in TSB’s

history.

In times of uncertainty, both trust and confidence are at a premium. TSB is well served by an established brand, backed

by the experienced leadership team led by Debbie Crosbie, who, at the onset of the pandemic, chose to waive their annual

bonuses for 2020. The strength of the bank is underpinned by its modern banking platform, now run independently in the

UK, that enables it to respond rapidly to the changing needs of customers. TSB remains a low risk, well capitalised bank

with strong net interest margin and opportunities to grow. That potential for growth has been particularly significant in its

lending to SMEs where 40,000 new business accounts have been opened over the past year, compared to 14,000 in 2019.

In our provision of the Bounce Back Loans Scheme (BBLS) loans TSB have provided over £0.5 billion to over 20,000

SMEs to help them adapt and remain operational during the pandemic.

Doing what matters for society

As the world’s first savings bank, TSB is rooted in social good and in helping to create social as well as economic value.

Today, taking forward that commitment is more important than ever.

During 2020, TSB launched its Do What Matters plan, setting out new commitments to address challenges such as climate

change, diversity and inclusion. These commitments have led it to become the first high street bank to be accredited by

the Good Business Charter, become a signatory of the UN Global Compact and begin to develop a strategic relationship

with Citizens Advice. The plan is focused on the areas where TSB can make its most meaningful contribution and its goals

are aligned with national and international standards. It is well integrated in the running of the business: five members of

the Executive Committee sponsor the key activities in it; hundreds of TSB employees were consulted to help finalise goals

and actions; and the Board is kept updated on progress on a monthly basis.

Although doing the right thing has always been part of how TSB works, it has now embarked on a journey to align the

business growth of TSB with its social and environmental contribution, and to set high benchmarks for others. This is

highlighted through TSB’s contribution to tackling fraud, including being the only bank to offer a Fraud Refund Guarantee.

It is simply the right thing to do for customers. In putting right every customer who is an innocent victim of fraud, TSB not

only prevent unnecessary harm to thousands of innocent people but also help educate the public on relevant threats of

fraud, and help the police with timely evidence to catch the perpetrators.

As the debate intensifies on more effective and collaborative ways to tackle and reduce fraud, based on the TSB

experience, TSB encourages other banks to work collectively to better protect customers from fraud and to inspire leaders

in other industries to develop further protections.

Financial summary

Like many financial service businesses, the impact of the pandemic is clearly visible in the results for 2020. The statutory

result, a loss before tax of £200.5 million, was impacted most significantly by credit impairment charges, which at £164.0

million have increased by £103.5 million compared to 2019. Those charges reflect the UK economic outlook, together with

rising unemployment. In addition, income was significantly reduced by supporting customers through the pandemic by

waiving interest charges on certain products. The results are further impacted by a provision for restructuring the Bank and

the estimated charges relating to the treatment of some customers in arrears.

Importantly however, this is only part of the story. TSB continues to benefit from a relatively low risk balance sheet, with

secured lending making up over 92% of all TSB loans. In key areas, the trading performance of the business has improved.

TSB’s loan book has grown strongly by £2.2 billion during 2020, as have customer deposits, with an increase of £4.2 billion

this year. As a result, the balance sheet remains strong as does the Bank’s capital position, although capital ratios have

reduced significantly in 2020 as a result of the business growth referred to above, current year losses and the adoption of

new capital regulations. TSB has also become more efficient as, despite having to invest in new operational measures as

a result of the pandemic, operating costs, measured on a management basis (as described on page 9), are down on 2019.

For all these reasons and others, it is believed that TSB is well placed to achieve sustainable growth in the coming years.


Strategic report (continued) Accelerating the three-year strategy

TSB’s three-year growth strategy, introduced in November 2019, has helped it navigate the challenges of 2020. Its goal is

to restore the Bank’s competitiveness through a stronger focus on serving customers more effectively. The strategy is built

on three pillars: customer focus; simplification and efficiency, and operational excellence. All three have become even

more important in the face of the economic disruption during 2020. As changes in consumer behaviour increased,

particularly the shift to online services and communications, TSB responded by accelerating the delivery of the strategy.

• TSB Smart Agent, an automated and live chatbot, was launched in March 2020 to extend our support for customers.

Working with Adobe, the Bank has provided online alternatives for most of the services traditionally provided in person

through branches. Video banking pilots have also been introduced in our branches enabling employees to support

customers remotely.

• New products have been launched, such as the Spend and Save current account, mortgages that have been tailored

for first-time buyers, as well as ‘Fix and Flex’ mortgages that give customers a more flexible mortgage option combined

with the certainty of fixed rates. In addition to its core offering, the Bank is broadening the services available to

customers through new partnerships with fintechs such as ApTap and Wealthify. Alongside expanding what the Bank

offers customers, it has also prioritised improving the quality of every customer experience, striving to compete better

with its peers.

• In September 2020, further changes to the branch network were announced, including the closure of 164 branches in

2021. These plans were already within TSB’s strategy, but were accelerated as consumer behaviour changed during

the pandemic. TSB remains committed to its branch network and retains one of the largest in Britain, but these changes

were needed to be able to invest in all of channels to serve customers more effectively over the coming years.

• During 2020, work was completed to take direct control of the technology services from the Sabis through its

partnership with IBM and, by operating on a UK-based, modern, multi-cloud platform underpinned by strong data

capabilities, the Bank can offer more services and introduce new features. TSB has over two million digitally active

customers, over 90% of transactions are through our digital or automated channels and over 70% of sales are through

our digital channels.

• Core operational services are resilient and the Bank has been able to deliver all operational services flexibly from

established locations as well as from employees working from home. Data and digital skills and capabilities are being

improved within TSB. Over 100 technology roles have been filled in the Bank’s new technology hub in Edinburgh. The

Bank’s apprenticeship scheme has been expanded to include digital and data skills.

Supporting customers during COVID-19

Despite all the challenges faced, TSB continued to serve its five million customers through branches, telephone operations

and digital channels throughout the pandemic. That was a result of the dedication and resilience of all TSB employees. As

well as providing day-to-day banking services, the Bank responded to what mattered most to customers and employees

during this crisis.

Special help for its most vulnerable customers was provided with calls to establish what they needed from TSB. To date,

TSB has granted around 114,000 payment holidays, related to £5.9 billion of loans to our customers, as a result of the

impact of COVID-19. TSB was also an early member of the schemes arranged by the Government to support businesses,

and has now provided over £0.5 billion in Bounce Back loans.

Employees went out of their way to help customers during this difficult time, and the commitment of all employees on the

front-line was recognised with a one-off payment of £500. This year TSB also launched new mental health support for

employees, with the introduction of free access to Unmind.


Strategic report (continued) Building on our brand and contributing to society

TSB continues to see improved reputation growth and its brand score is at a three year high. TSB will now develop the

brand further as it enters the second year of its strategy. TSB observes customers turning to the safety of established

providers and this affords opportunities to an established and well-known brand like TSB.

TSB’s new brand proposition, Life Made More, encapsulates what it offer to communities, and sets out a new identity and

direction for TSB. TSB will continue to refurbish branches and invest in new advertising campaigns during 2021.

At the same time, TSB is significantly expanding its social and environmental strategy through the launch of the Do What

Matters plan. The plan sets out how TSB will do more to help customers to be more money confident through its iconic

and market leading Fraud Refund Guarantee, support small businesses, build a diverse and inclusive workplace, support

communities and reduce our environmental impact.

The Do What Matters plan sets out everything TSB will do to contribute to a better society and is designed to align with

our strategy and purpose. We continue to collaborate with key stakeholders to make sure the Do What Matters plan, and

its actions, remain focused on the most relevant and valuable contributions TSB can make.

We have set clear commitments, with measurable actions aligned to national and international targets, in each of the five

areas of our three year plan to do what matters for customers, businesses, employees, communities and the environment.

These steps have enabled us to become the first high street bank accredited by the Good Business Charter as well as

signatories of the UN Global Compact.

Outlook

The UK enters 2021 in a deep economic downturn with ongoing challenges from the continuing impact of COVID-19,

changes as a result of implementing Brexit and a low interest rate environment. But despite this challenging backdrop,

TSB believes it is well positioned as its starts a new financial year.

Towards the end of 2020, TSB’s shareholder, Sabadell, announced that they would bring forward a strategic review in

2021. The Board of TSB will ensure that TSB continues to focus on serving customers and revitalising the brand to deliver

against its growth strategy. Any decision that results in a change of ownership or governance will be managed with the

highest level of rigour and care. However, TSB is a ring-fenced UK bank and its priority is to continue the progress it has

made on its growth strategy and maintain its strong capital position.

TSB has the potential for significant value creation in the coming years. The growth strategy is boosting competitiveness

and sharpening the cost-to-serve ratio. The Bank’s enhanced digital offerings are underpinned by a modern IT platform

and the Bank is right-sizing and modernising its branch network to serve customers across the whole country. With the

changes made as part of the strategy, the Bank has taken the action needed to ready it for whatever may happen in 2021.

Its priority going forward is delivering on the growth strategy and getting the business back to profitability.


Strategic report (continued) Purpose, business model and key performance indicators

TSB’s purpose – Money confidence. For everyone. Every day

TSB offers a range of retail banking services and products to individuals and small business banking customers in the UK.

TSB has a multi-channel model, including full digital (internet and mobile) and telephony capability and national branch

coverage.

TSB’s multi-channel presence creates an opportunity for TSB to serve customers better. Customers want a bank that

removes the hassle from banking and provides access to both people and digital tools which can give them confidence in

managing their money. TSB continues to develop digital-led products and servicing capabilities that meet customers’

needs, which have significantly enhanced how TSB better supports its customers. It is the importance of the digital

opportunities in which TSB will continue to invest, together with the benefits of the multi-channel distribution model, and

how TSB serves its customers every day that will make the difference at TSB. At TSB this purpose is called ‘Money

confidence. For everyone. Every day.’

Business model and key performance indicators

TSB’s business model reflects a simple retail business and is outlined below:

Component Description Financial

statements Key performance

indicator

Customer

confidence

TSB seeks to deliver a banking experience that is the primary reason for

customers to choose and remain with TSB, and which will increasingly set TSB

apart from other banks and providers of financial services.

Central to this is the development of TSB’s purpose ‘Money confidence. For

everyone. Every day.’ through which it will invest in digital capabilities and

customer led service strategies.

n/a Customer advocacy (Net

Promoter Score)

2020 2019

(4) 10

Total digitally active customers

2020 2019

66.4% 63.4%

Sources of

funding and

capital

Money deposited by customers into their bank and savings accounts provides the

majority of the funds used to support lending to customers. TSB also raise funds

from other sources, including wholesale funding markets, that diversify its funding

profile. TSB’s shareholder also provides funding in the form of debt and equity

capital.

Page 29 Share of personal bank account gross flow

2020 2019

4.5% 3.9%%

Share of PCA stock

2020 2019

4.3% 4.4%

Loans and liquid

assets

Funds deposited with TSB are used to support lending to customers who wish to

borrow. A portion of funds are held in reserve, in the form of a liquidity portfolio,

to meet any unexpected funding requirements.

Page 34 Mortgages gross lending (£m)

2020 2019

6,096.6 5,838.1

Income

TSB earns income in the form of interest that it receive on the loans it makes to

customers and from its liquidity portfolio and it pay interest to savings and bank

account customers on the money they deposit. TSB also earns other income in

the form of fees and charges for the provision of other banking services and

commissions from the sale of certain products such as general insurance.

Page 47 Net interest margin

2020 2019

2.47% 2.75%

Charges

The costs of running the Bank include paying TSB employees, running branches,

investing in the business (such as developing the digital opportunities) and paying

for marketing. Occasionally, customers are unable to repay the money they

borrow from TSB; this is also a cost to the Bank in the form of an impairment

charge. Finally, TSB complies with its tax obligations to Her Majesty’s Revenue

and Customs (HMRC).

Page 49 Cost:income ratio

2020 2019

103.9% 89.3%

Asset quality ratio

2020 2019

0.51% 0.20%

Risk management (financial statements on page 54)

Effective risk management underpins TSB’s business model. The Board sets an appetite for risk and monitors the risks

arising from delivery of TSB’s strategy through its business model to ensure the Bank remains liquid, solvent, operationally

stable, trusted and compliant. When appropriate, the Board in turn will determine whether to return any profits made by

the Bank to the shareholder by way of dividend or to reinvest the profit to support the future growth of the Bank.


Strategic report (continued) Section 172 statement

Overview

In overseeing delivery of TSB’s purpose and strategy, TSB’s directors are always mindful of their duties under the

Companies Act 2006, including as set out in section 172. The Board recognises that TSB’s long-term success is only

possible through engagement with, and having regard to, the interests of key stakeholders, which for TSB includes our

shareholder, customers, employees, wider communities and regulators. TSB’s governance framework seeks to ensure

that the Board appropriately considers stakeholder considerations in decision making.

The Board monitors and challenges progress in the performance of the business through its review of balanced scorecard

metrics which are structured around TSB’s primary corporate objectives, monitoring performance against risk appetite and

reviewing customer management information that measures the execution of customer conduct strategies. These metrics,

which form the basis of the KPIs reported on page 6, together with a wider dashboard of management information, are

reviewed and discussed. The latter includes a ‘maturity matrix’, which was developed in 2020 and enables the Board to

stay abreast of progress in key strategic projects and initiatives. In addition, the Remuneration Committee reviews a sub-

set of balanced scorecard metrics at least twice a year to support its decision making on variable remuneration outcomes.

In this way variable remuneration outcomes are directly linked to metrics that support the delivery of strategic objectives.

The proactive oversight and challenge provided by the Board is central

to the ongoing development and execution of TSB’s purpose and

strategy, including the extent to which the interests of TSB’s key

stakeholder groups are listened to. This is further discussed below and

demonstrated through the case study in the box to the right.

• TSB’s shareholder, Sabadell. Given Sabadell’s 100% ownership of

TSB, it is natural that the promotion of the long term success of TSB,

through the development of a clear purpose and strategy, is aligned

with the interests of Sabadell, including in the current circumstances

where Sabadell is undertaking a strategic review of its international

operations. Sabadell’s interests are represented at Board by three

shareholder appointed Non-executive Directors. Any circumstances

where shareholder and TSB interests are not aligned are managed

through the disclosure and management of any such potential

conflict. Sabadell’s interests are further represented through the UK

Steering & Coordination Committee (UKSCC). The UKSCC seeks

to provide Sabadell with a regular overview of the performance of

TSB and to ensure that TSB policies and processes are aligned to

those of the Sabadell Group where it is appropriate to do so. Certain

members of the Bank’s Executive Committee are appointed as

members of the UKSCC. During 2020, TSB’s Chief Executive

presented the planned acceleration of TSB’s strategy and financial

forecasts, taking into account developments during the COVID-19

pandemic, to the Sabadell Board.

• Customers and wider community. The Board takes account of

customer interests through regular reviews of key scorecard

measures such as NPS and customer conduct metrics. Two ‘focus

sessions’ on vulnerable customers were held during 2020, providing

the opportunity for the Board to interrogate and challenge

management’s plans to enhance the service being provided to such

customers as part of the ‘Money Confidence’ programme. The

Board has requested that the focus on vulnerable customers

continues, with two further progress reports scheduled for the Board

during 2021. The interests of customers, as affected by the COVID-

19 pandemic, particularly in respect of their ability to continue to

access their products and services or to receive support where

difficulties were experienced in meeting loan repayment obligations,

have been fully considered as outlined in the COVID-19 response

case study. The Board also fully recognises its obligations to

consider the interests of the wider communities in which TSB

operates and this is demonstrated in its challenge and support of

the Do What Matters plan.

Case Study: Consequences of the COVID-19 pandemic

The emergence of the COVID-19 pandemic in early 2020 and the consequential restrictions on daily life created very significant and unexpected challenges for our customers and our employees throughout the year. The Board played a key role in monitoring and challenging the priorities set and steps taken by the Executive Committee to:

• Protect the safety and well-being of our employees while continuing to ensure that our products and services remained available for customers; and

• Make available the appropriate support to customers experiencing short term liquidity concerns or who found themselves in financial difficulty.

TSB managed its response by invoking its highest category of incident management protocols with regular updates provided to the Board. The Board held regular update calls, on a weekly basis during the initial peak of the pandemic, so that its oversight, challenge and support was provided on a timely and regular basis. The Board also reviewed, challenged and supported proposals from the Executive Committee to accelerate aspects of the strategy, previously approved in November 2019, where it was appropriate to do so following the emergence of the pandemic. Most notably, the Board supported the proposal to accelerate the transformation of the branch network including the difficult decision to close a further 164 branches, announced on 30 September 2020. This proposal took account of the accelerated migration of customer activity from branch to digital and mobile channels. The Board challenged the proposed plans to ensure that the appropriate support and options were available for employees placed at risk of redundancy and that the interests of vulnerable customers were properly addressed including a proactive outbound programme of calls tailored for individual customer needs.


Strategic report (continued) Section 172 statement (continued)

• Suppliers. TSB believes that establishing a close relationship with suppliers (including a clear accountability

framework) is a pre-requisite for resilient customer services. The Board approves the outsourcing strategy annually,

together with any changes to the boundaries of outsourced critical services. Operational excellence is a critical pillar

of TSB’s strategic plan and, as part of this, TSB will work more closely with certain key suppliers, having taken direct

control of key relationships formerly managed by Sabis, the previous supplier of TSB’s outsourced IT services.

• Regulators. Open and honest engagement with regulators is a cornerstone principle of the UK regulatory environment.

The Chief Risk Officer reports regularly to the Board Risk Committee and the Board on material matters of regulatory

liaison and TSB’s assessment of the quality of the relationship with each regulator. Certain Board members maintain

a direct relationship with the FCA and PRA through the framework of ‘proactive engagement and continuous

assessment’ meetings and report on key themes discussed through committee and Board meetings as appropriate.

• Employees. The Board is proud of the commitment of our employees and the collaborative culture in TSB, particularly

in 2020 when our employees, while adopting safe working practices, have adapted the way they work to ensure that

customers have been supported throughout the COVID-19 pandemic (as further explained in the Directors’ report on

page 20). During this challenging period, employees have continued to support each other and work together to deliver

for our customers. The Board operates a framework that takes account of the interests of our employees, including:

➢ promoting the role of recognised trade unions in independently representing the interest of employees;

➢ the appointment of a Board level whistleblowing champion;

➢ providing challenge, through the auspices of the Remuneration Committee, to ensure that remuneration policy is

appropriate for all employees, as well as executives, and provides for competitive remuneration strongly aligned

to the delivery of TSB’s strategic goals; and

➢ undertaking semi-annual reviews of talent and succession, particularly in respect of leadership roles within TSB.

The Board also receives a presentation on an annual basis from The Link to facilitate a direct engagement between

the Board and employees. The Link is a forum for employees across all levels and all parts of TSB with five regional

groups covering the country. It gathers and builds on employee feedback and enables meaningful dialogue between

employees, the Executive leadership and the Board on a wide range of topics. Throughout 2020, The Link focused on

areas such as the Do What Matters plan, new products and services, employee wellbeing, engagement and

responding to COVID-19, including new ways of working. The outputs from every meeting of The Link are presented

to the Executive Committee to help inform TSB’s decision making. The Board plays an active role in promoting and

challenging progress in establishing a truly diverse and inclusive culture at TSB and carries out succession planning

reviews to ensure continuity of skilled employees.

• Stakeholders and society. The events of 2020 have reinforced the expectations of society on businesses to contribute

positively and more widely in the communities in which they operate. Given its origins, TSB has always taken its role

in society seriously and in July 2020 launched its Do What Matters plan. This sets out a clear framework of actions

aligned to TSB’s purpose and strategy that are intended to meet the expectations of stakeholders so that TSB

contributes fully in the communities in which it operates. The Board reviewed and supported the Do What Matters plan

and receives updates on progress on a monthly basis and intends to do so over the life of the plan.

TSB’s Do What Matters plan formalises its commitment to reducing its impact on the environment while helping

customers and employees do the same. This was agreed with the Board in June 2020 ahead of its launch. As part of

this plan we have committed to reduce our environmental impact and progress against our goals is outlined in the

Directors’ report on page 21.

Other non-financial disclosures

TSB has a moral, legal and regulatory duty to prevent, detect and deter financial crime and maintains a financial crime

framework. This framework is supported and reinforced by TSB systems and behaviours which puts the customer at the

heart of every interaction. TSB promotes an environment which is hostile to illicit activity to protect its customers,

employees, and communities from financial crime, and continues to invest in further system control enhancements. TSB’s

compliance with requirements of the financial crime framework is monitored via ongoing control testing, assurance, audit,

and the provision of management information at senior governance committees.

TSB’s Modern Slavery Statement (which is available on our website) sets out the policies we apply and actions we take to

ensure that our employees and customers are treated with dignity and respect. This includes raising awareness of issues

that could put our customers at risk such as vulnerability and exploitation. The statement also explains how we ensure that

TSB’s values are applied within our supply chain including the due diligence we carry out on our suppliers.

https://tsbcloud.sharepoint.com/sites/Newshub/SitePages/2020/August/Already-Doing-What-Matters--TSB-is-first-bank-awarded-the-Good-Business-Charter.aspx


Strategic report (continued) Review of financial performance

The Bank’s performance is presented on a statutory basis, as explained under the basis of presentation on page 23, and

structured in a manner consistent with the key elements of the Bank’s business model as explained on page 6.

Income statement

2020

£ million

2019

£ million

Net interest income 786.4 841.1

Other income 146.5 146.1

Total income 932.9 987.2

Operating expenses (969.4) (881.3)

Impairment (164.0) (60.5)

Statutory (loss)/profit before taxation (200.5) 45.4

Taxation 44.3 (19.2)

Statutory (loss)/profit for the year (156.2) 26.2 TSB incurred a statutory loss before tax for 2020 of £200.5 million (2019: £45.4 million profit) with financial performance

significantly affected by the COVID-19 pandemic. The four key factors driving the loss before taxation were: • a reduction in total income of 5.5% to £932.9 million (2019: £987.8 million), primarily reflecting lower income from

overdraft pricing changes, the waiving of certain fees and charges resulting from government and regulatory measures

in response to COVID-19, and lower interest rates and consumer spending. This was partially offset by strong

mortgage trading performance in the second half of the year. The prior year also benefitted from the recognition of

fees in respect of changes to card servicing arrangements;

• an increase in credit impairment charges to £164.0 million (2019: £60.5 million), resulting from the expected

deterioration in the economic outlook, including a forecast decline in house prices and rise in unemployment;

• restructuring charges of £90.6 million (2019: £43.7 million) (£89.1 million in operating expenses and £1.5 million in

other income). These included the costs of the 164 branch closures announced in September 2020 following the

acceleration in TSB’s transformation as a consequence of changes in customer behaviour induced by the COVID-19

pandemic. Restructuring costs also included severance costs from transformation activity in both the branch network

and head office functions; and

• a provision of £55.0 million was recognised for estimated charges relating to the treatment of some customers in

arrears while being supported by TSB’s collection and recoveries function. Income

Net interest income decreased by 6.5% to £786.4 million. This was primarily due to lower income from overdrafts reflecting

regulatory driven pricing changes. The reduction was also due to the waiving of interest from customers who required the

Banks’s support in the light of the COVID-19 pandemic and from lower overdraft balances as customer spending activity

reduced during the COVID-19 lockdowns.

Other income was broadly unchanged at £146.5 million. Lower levels of consumer spending, as a result of the COVID-19

pandemic, resulted in lower interchange income, international payments, foreign exchange and ATM reciprocity. The prior

year also benefitted from the recognition of fees in respect of changes to card servicing arrangements. These reductions

were, however, mitigated by income relating to the IT systems migration in 2018 which included additional expected

receipts from the migration dowry provided by Lloyds Banking Group of £17.6 million and insurance receipts of £17.5

million. Operating expenses

Operating expenses increased by 10.0%, with ongoing progress on efficiency more than offset by the costs of restructuring

the Bank, primarily representing the costs of branch closures announced in September 2020 and costs of reorganising

certain head office functions. The increase was also due to a provision of £55.0 million for estimated charges relating to

the treatment of some customers in arrears. Excluding these items, operating expenses on an internal management

reporting basis decreased by 2.3% to £827.7 million.

2020

£ million

2019

£ million

Management basis operating expenses 827.7 847.6

Costs of restructuring the Bank 89.1 40.2

Collection and recovery conduct charges 55.0 -

Migration related items 1.0 (4.0)

Banking volatility (3.4) (2.5)

Statutory basis operating expenses 969.4 881.3 Impairment charge

The impairment charge increased by 171.1% to £164.0 million, which is linked to the forecast decline in house prices and

rise in unemployment under a deteriorating economic outlook. A summary of the economic scenarios used for assessing

expected credit losses and related scenario weightings is provided in note 9 on page 39.


Strategic report (continued) Review of financial performance (continued)

Balance sheet, funding and capital

TSB’s balance sheet remained strong with the loan to deposit ratio and capital ratios remaining broadly stable and TSB

maintaining liquid assets in excess of regulatory requirements and internal risk limits.

2020

£ million

2019

£ million

Customer deposits 34,375.3 30,182.4

Non-customer funding 5,156.3 6,555.7

Borrowings from the Bank of England 3,065.8 4,483.5

Debt securities in issue 1,699.2 1,676.3

Subordinated liabilities 391.3 395.9

Shareholder’s equity 1,724.9 1,900.8

Sources of funding 41,256.5 38,638.9

Other liabilities 1,165.9 897.0

Total equity and liabilities 42,422.4 39,535.9

Loans and advances to customers 33,317.9 31,075.8

Liquid asset portfolio(1) 7,530.7 6,764.4

Loans and liquid assets 40,848.6 37,840.2

Other assets 1,573.8 1,695.7

Total assets 42,422.4 39,535.9

(1) Comprises balances at central banks of £4,910.1 million (2019: £4,427.3 million), debt securities of £2,620.6 million (2019: £2,136.0 million) and reverse repurchase

agreements of £nil (2019: £201.1 million). Balances at central banks are combined with other cash balances and demand deposits of £146.2 million (2019: £165.5

million) when shown on the balance sheet on page 25. Source of funding • Customer deposits. Customer deposits increased by £4.2 billion, or 13.9% to £34.4 billion, reflecting lower levels of

spending and increased savings as a result of lockdown restrictions and government initiatives in response to COVID-

19. Retail customer deposits grew by £3.2 billion to £31.9 billion with strong growth in both savings and current account

balances. Business banking deposit balances also saw strong growth of £1.0 billion, or 71.9% to £2.5 billion, as a

result of the flow of customers from the Incentivised Switching Scheme and business customers maintaining higher

levels of liquidity in 2020, supported by funds received through the Bounce Back Loan Scheme. • Non-customer funding. Non-customer funding decreased by £1.4 billion to £5.2 billion, largely due to a cumulative

repayment of £1.4 billion of borrowings under the Bank of England’s Term Funding Scheme. In 2021, TSB expects to

utilise the Bank of England’s Term Funding Scheme with additional incentives for SMEs, introduced in March 2020.

Debt securities in issue were broadly unchanged reflecting the maturity of all remaining notes issued under TSB’s

securitisation programmes offset by the issuance, to Sabadell, in December 2020 of £450 million of senior unsecured

debt securities to meet Minimum Requirements for Eligible Liabilities (MREL) requirements. • Capital resources. TSB’s capital position has remained above regulatory minimum requirements and internal risk

appetite thresholds, with a Common Equity Tier 1 (CET1) capital ratio of 14.9% (2019: 20.6%) and a leverage ratio of

3.7% (2019: 4.6%) on a CRD IV fully loaded basis. In 2020, the CET1 capital ratio decreased by 5.7 percentage points

reflecting the statutory loss for the year, lending growth, and the effect of the introduction of new capital regulations in

2020 which resulted in an increase in risk weighted assets following a change to the definition of default.

Loans and liquid assets • Loans and advances to customers. Loans and advances to customers increased by £2.2 billion, or 7.2% to £33.3

billion. Secured retail lending growth of £1.6 billion to £30.8 billion primarily reflects strong trading performance in the

second half of 2020, following lower levels of activity in the first half due to the initial COVID-19 lockdown restrictions.

Higher mortgage origination activity was driven by competitive pricing, improved customer retention and TSB’s

operational readiness during periods of increased demand, offset by the expected reduction in the closed Whistletree

portfolio. Business banking loan balances increased by £579.4 million to £708.4 million, primarily due to lending

through the Bounce Back Loan Scheme. Unsecured growth was more muted, reflecting lower demand as consumers

reduced their spending and increased levels of saving. • Liquid asset portfolio. TSB’s liquidity portfolio comprises highly liquid assets, primarily cash reserves at the Bank of

England, UK gilts, supranational bonds, development bank bonds, and covered bonds, which are available and

accessible to meet potential cash outflows. The increase in the liquidity portfolio during 2020 largely reflects customer

deposit growth exceeding customer lending growth, partially offset by the partial repayment of borrowings under the

Bank of England’s Term Funding Scheme and higher expected outflows as a result of the growth in lending

commitments.


Strategic report (continued) Principal risks and uncertainties

Approach to risk

TSB seeks to remain liquid, solvent, operationally stable, trusted, and compliant at all times. The objective of TSB risk

management is to support and enable these outcomes. The processes to identify, measure and control the risks inherent

in its business model are embedded in TSB’s risk management framework. Risks faced by TSB in delivering its business

strategy are managed in the context of the wider communities in which TSB operates and the Do What Matters plan. TSB’s

approach to managing these risks is described below. TSB’s principal risks and uncertainties are described starting on

page 13.

Risk management framework

The risk management framework creates coherent standards and practices for all risk management activities and

processes in TSB. The framework is designed around a simple model for categorising risk, so that all the components of

our risk management such as risk appetite, governance, policies, reporting, assurance and organisational design are

aligned to the same hierarchy of risks. The five principal risk categories are shown in the table below.

Financial risk The risk of TSB having inadequate earnings, cash flow or capital to meet current or future requirements and

expectations.

Credit risk The risk that a borrower or counterparty fails to pay the interest or to repay the principal on a loan or other financial

instrument as it falls due.

Operational risk The risk of loss, damage or disruption arising from inadequate or failed processes, people and systems.

Conduct risk The risk to the delivery of fair customer outcomes and market integrity.

Financial Crime

risk

The risk that systems and controls are not adequate to manage financial crime within TSB’s risk appetite and

regulatory framework.

Accountability

Risk management is embedded at TSB through clear accountabilities across three independent lines of defence. This

enables clear understanding and separation between functions that own and manage risks faced by the business (first

line), provides oversight and challenge (second line), and provide independent audit and assurance (third line).

First line of

defence

• Identifies and manages risks in line with prescribed TSB risk management standards.

• Designs and implements control frameworks, preventative measures, processes and strategies to mitigate risks in

line with risk appetite.

• Reports on its business unit and risk category risk profile and the effectiveness of control frameworks.

• Applies and embeds TSB risk management standards throughout the business through its policies, governance

and control frameworks.

• Operates day-to-day control activities, tests and monitors the effectiveness of controls and compliance with policies

and standards including business performance reviews, quality checking, and scenario analysis.

Second line of

defence

• Sits within TSB’s Risk Division.

• Maintains TSB’s risk management framework and sets enterprise wide standards for risk management activity.

• Provides independent oversight, support and challenge to the first line in managing risks to these standards.

• Monitors and oversees risk management activity in the first line and aggregates risk reporting to provide an

enterprise wide view of TSB’s risk profile and risk appetite to Board and Executive committees.

Third line of

defence

• Provides independent and objective assessment of the risk management activities of the first and second lines.

• Reports on the effectiveness of risk management activities to the Board and senior management. Employees in TSB are individually accountable for identifying, assessing and managing risks within their area of

responsibility. Risk management responsibilities are embedded through a risk focused culture, supported by efficient

governance and achieved through a prudent risk appetite to support TSB’s growth strategy. Risk culture TSB culture is monitored by the Executive Committee and Board, and the importance of individual accountability for

managing risk is reinforced by the approach to performance management and remuneration for all employees. Our aim is

for both our employees and our customers to experience the benefits of a high performing culture, supported by a clear

customer focus where employees feel confident that customers receive fair outcomes that meet a genuine need.

The Board measures culture through the Culture Dashboard, which provides insight into TSB’s culture against nine traits

so that actions can be identified to enhance a high performing culture. The latest dashboard reflects strengthening in two

traits; accountability and speak up which are now in line with the financial services industry. TSB will continue to embed a

culture which in 2021 includes a new employee engagement roadmap to help engagement with strategy and purpose, and

delivery against our Do What Matters plan commitments to improve team diversity and diversity of thinking. TSB sets a

consistent tone from the top, with senior leaders role modelling the TSB culture with actions that match their words, and

everyone feeling safe to share ideas and speak up.


Strategic report (continued) Principal risks and uncertainties (continued)

Risk appetite

TSB defines risk appetite as the amount and type of risk that it is willing to take in the pursuit of its objectives. Risk appetite

is approved by the Board and is aligned to, and approved by, Sabadell. Through regular meetings and reporting, the Board

monitors performance against appetite and, if necessary, has appropriate plans to address any appetite breaches.

TSB has a clearly defined and proportionate risk appetite that supports its strategic objectives and seeks to provide

confidence to its customers, regulators and shareholder. TSB is not a specialist lender and does not seek to differentiate

itself as a provider of niche products. At the highest level, TSB aligns its risk appetite to UK mainstream retail banking.

Risk appetite is calibrated so that it remains within the range of mainstream retail banking peers on every significant

measure of risk. TSB aligns its risk appetite to a statement of its attitude to each of its five risk categories and its culture.

These, along with appetite measures and thresholds, are articulated in the Risk Appetite Statement.

Risk governance

Risk ownership and accountability sits with individuals, supported by governance and reporting via TSB’s risk committees.

These are aligned to the five principal types of risk as described in the table below. Each committee is responsible for

monitoring TSB’s risk profile and challenging risk exposures across the relevant risk type in line with the risk appetite set

by the Board.

This committee structure enables efficient decision making, providing clear escalation and reporting of risk to senior

management and the Board which is responsible for providing oversight of the effectiveness of the risk management

framework. A Risk Committee is aligned to each of our Level 1 risk categories to provide a dedicated focus on managing

those risks.

Financial Risk (Asset & Liability Committee)

Chaired by the Chief Financial Officer, the committee is responsible for the strategic management of TSB’s balance sheet, the profit

and loss implications of balance sheet management actions and the risk management framework for market risk, liquidity risk, capital

risk, earnings volatility and economic value.

Credit Risk Committee

Chaired by the Chief Risk Officer, the committee is responsible for the coordination and aggregation of all credit risk management

activity, management of TSB’s credit risk profile, including credit risk appetite metrics and credit strategies, and TSB’s compliance with

all relevant credit regulation and legislation.

Operational Risk Committee

Chaired by the Chief Operating Officer, the committee is responsible for the aggregation and coordination of operational risk

management across the Bank, monitoring and challenging the operational risk profile, including key operational risks and controls, and

for ensuring appropriate escalation and visibility of relevant breaches, losses and events.

Conduct Risk Committee

Chaired by the Customer Banking Director, the committee is responsible for the aggregation and coordination of conduct risk

management across the Bank including delivery of substantially fair customer outcomes, compliance with relevant conduct regulation

and legislation, monitoring and challenging the conduct risk profile, including key conduct risks and controls, and for appropriate

escalation and visibility of relevant weaknesses, breaches, losses and events.

Financial Crime Risk Committee

Chaired by the Chief Risk Officer, the committee is responsible for assessing whether the risk of criminal conduct relating to money or

financial services or markets is appropriately managed across TSB. The committee monitors and challenges the financial crime risk

profile including key financial crime risks and controls, appropriate upward escalation and visibility of relevant breaches, losses and

events relating to the financial crime risk categories.

In addition, the Model Governance Committee, chaired by the Chief Risk Officer, is responsible for the development,

implementation and effectiveness of the model governance framework (covering policies, methodologies, systems,

processes, procedures and people). This includes articulating the extent and type of model risk to which TSB is exposed,

acting as the Designated Committee as required by the Capital Requirements Regulation.



The Board closely monitors risks that have the potential to materially impact execution of strategy. Notwithstanding the

improvement in IT stability, the significant impact of the COVID-19 crisis has shifted the focus of our principal risks in 2020.

The Bank’s response to COVID-19 has resulted in enhancements and adjustments to the control environment across the

Bank to better support our customers. This included facilitating working from home for most employees, adjusting the

working environment for those employees that continued to work on-site, providing support to customers in financial

difficulties, policy adjustments, supporting vulnerable customers, accelerating on-line forms for customers, and enhanced

monitoring to enable TSB to respond quickly and effectively in supporting customers and employees.

• Credit: TSB has a proactive approach to managing credit exposure with close monitoring and review of new lending,

adjusting underwriting criteria where appropriate. The Board has closely monitored adjustments to credit strategies and

customer journeys to support customers who require support from our Financial Support Services team. In response

to COVID-19, TSB has been assisting customers through relief measures such as payment holidays and the Bounce

Back Loan Scheme, whilst actively monitoring and managing the credit and financial risks arising from these financial

support measures. The modelling of customer behaviour is supporting an effective operational response and tailored

customer treatments when repayment holidays come to an end.

• Operational: TSB’s operational response to COVID-19 has enabled the Bank to continue to operate effectively whilst

keeping customers and employees safe. Customers’ needs have been successfully met where fast-paced changes

were required, enabling large numbers of employees to work remotely and manage increased operational volumes,

requests for payment holidays and new types of business lending. Control has been exercised from the outset through

TSB’s incident management framework.

• Conduct: The response to COVID-19, including the assistance provided to customers as they exit COVID-19 related

support strategies, has been subject to regular review by the Executive and Board. Areas of significant focus, with

Executive and Board oversight, have been the identification and support of customers in financial difficulty, vulnerable

customers, rectifications, bereavements and complaints.

• Financial Crime: TSB continues to enhance its fraud control environment and systems detection capabilities. During

2020, significant IT investment included upgrades to core detection systems for transactional fraud.

• Financial: A range of high level potential mitigations for financial risks including pricing actions to manage margins

given lower interest rates; possible credit policy actions, particularly if there is a sustained downturn; and potential cost

reduction actions involving more discretionary elements of the cost base.

The consequences of Brexit are considered to present potential financial and credit risks to the Bank. No operational

continuity risks materialised for TSB as the UK exited the EU but should any other risks materialise, these would be

managed through TSB’s risk management framework to maintain operational continuity.

Our financial stability, operational resilience and customer outcomes are also key themes in the risks considered by the

Board throughout 2020 and are detailed below.



Description Mitigation

Risk of a systemic crisis

The current COVID-19 crisis continues to evolve while the risk of

a new systemic crisis emerging remains.

The primary risks to TSB include increased pressure on capital

resources, safeguarding and supporting the well-being of

customers and employees, and operational resilience.

As the crisis continues, more customers will require support

through financial difficulty or vulnerability, and our credit and

customer strategies and processes will require continued close

review.

TSB remains well capitalised. The key risks to capital have been

captured in the Bank’s financial forecast, including the

implementation of the new mortgages IRB models, and are being

closely monitored. TSB continues to focus on identifying and

delivering capital optimisation opportunities, as well as being

prepared to issue Additional Tier 1 (AT1) instruments if required.

TSB has taken a proactive approach to risk management during

COVID-19, responding swiftly to customer needs and regulatory

guidelines. This has included waiving fees and interest charges,

implementation and monitoring of repayment holidays,

accelerating the use of on-line forms for customer services,

proactive contact for vulnerable customers and implementation

and monitoring of other financial support measures such as the

Bounce Back Loan Scheme.

Customer behaviour modelling has been used to establish an

effective operational response and tailored customer treatments

when repayment holidays come to an end. While fraud levels

increased across the industry, TSB has continued to support

customers through the industry’s first ever Fraud Refund

Guarantee.

TSB used its established incident management framework to

respond effectively and efficiently to the pandemic and the

associated operational risks. Our response remains flexible to the

constantly evolving situation to continue to provide an acceptable

level of customer service and operational stability.

Threats to profit resilience

Lower for longer rates, continued market competition and

increasing regulatory requirements have reduced profitability

across the sector.

The emergence of COVID-19 during 2020 has put further pressure

on profitability, both in the short term due to increased impairments

and the impact of customer treatments on income, and in the

medium term if there is an extended period of low or

negative interest rates.

Should the credit shock from COVID-19 deteriorate significantly,

there is risk of a more rapid short-term impact on profit and capital

from the associated risks.

Various aspects of TSB’s strategy have been accelerated to

mitigate the impact of these risks, such as the digital transformation

programme which responds to customer need, reduces costs, and

improves efficiency.

A robust discipline is maintained so that risk adjusted returns on

new business are sufficient and credit adjustments have been

made where appropriate so that customers continue to borrow well

in the current economic environment.

Investment has been made in our Financial Support Services

capabilities ahead of an expected increase in volumes of customers

requiring support once government support schemes are

withdrawn.

Management of customer harm

There are increasing societal and regulatory expectations for

higher standards of diligent and proactive management of

potential customer harm.

Customer harm will have occurred if a customer has experienced

material distress and/or inconvenience, obvious detriment or in

some instances an unfair outcome. In the main this is likely to

occur due to failures in systems, policy, process or controls.

The embedding of our risk management framework and maturing

conduct risk management helps both identify where customer

harm may occur and has occurred, so proactively managing

potential impact on customers.

The Executive Committee and Board receive regular

management information on potential and actual customer harm,

together with actions taken to prevent harm and address any

weaknesses. Management is improving practices relating to

treatment of some customers in collections and recoveries.



Description Mitigation

Data management and security

Without strong data governance practices data could be mis-used,

mis-interpreted, incorrect, or not available. This could result in

issues under GDPR and BCBS 239 where data should be

accurate, available on demand by customers, used for the

purpose collected, and be aggregated and reported accurately –

potentially leading to customer detriment, poor decision making,

incorrect reporting, regulatory censure and fines.

As more services and customer interactions become digital the

potential impact of a successful cyber-attack grows. Each year

there is an increase in the complexity and sophistication of attacks

around the globe and while all industries are targeted, the banking

industry remains high on the criminal hacking agenda.

Without effective mitigating controls there is a significant risk that

an attack could lead to service downtime and customer disruption,

material data loss, financial loss , remediation cost, and

reputational damage.

TSB has continued to focus on improving the monitoring and quality

of customer data, and the delivery of Big Data and Operational Data

Store projects will enable effective use of quality data.

Focus is on maintaining a fully effective security control

environment, building further capability to prevent and detect the

evolving types of attack with the right tools and technology.

Risk of negative interest rates

The Bank of England published a review of negative interest rates

in its August 2020 Monetary Policy Report. The Governor of the

Bank of England confirmed that the introduction of negative

interest rates is one of many tools under consideration to steer the

economy towards its 2% inflation rate target. The Bank of England

has subsequently issued a survey across the banking industry to

assess operational readiness.

TSB’s capital position could come under pressure due to margin

compression and potential reduction in structural hedge income.

TSB is planning for the prospect of negative interest rates. The

initial priority is for TSB to be operationally ready.

An assessment is being made of the potential financial impact

alongside the potential changes to product design, pricing, and

hedging and investment strategies to offset reduced income.

Management of the financial impact will be influenced by how the

government chooses to implement negative rates, market-wide

changes in pricing and products (particularly from price-makers),

and any additional regulatory guidance that emerges.

Maintaining technical and operational resilience

Disruption to business activities across TSB, and the banking

industry, remains a material inherent risk and an area of high

importance to our customers and regulators.

With the reducing reliance on cash by our customers, the ability to

maintain digital services to our customers and back office

processing grows ever more important to prevent customer

detriment, losses through rectifications, remediation costs, and to

avoid reputational damage.

TSB has taken direct control of its technology estate, transitioned

services to new third parties, and built further capability in the

technology function.

Technology is always evolving and with increased transparency

following the technology estate transition, ongoing focus is on an

effective and embedded technology control environment, building

further resilience into our existing technology estate, and any new

technology. Increased regulatory scrutiny is expected in 2021

following the new Operational Resilience regulation, covering

process, technology, people, premises, and third parties. The

necessary steps are being taken to comply and to demonstrate the

resilience and interchangeability of key business services.

Increased competition with failed differentiation

Fintech and other technological advances create alternatives to

the traditional value chain and ways in which banks currently

operate and service customers.

A core component of TSB’s strategy is leveraging the technology

to improve digital services. TSB has identified its core customer

base and development of new products, services, and experiences

are aimed specifically at meeting those customers’ needs.

Examples include the launch of the Spend and Save current

account, new mortgage products and features including digital

product transfers, and new partnerships with ApTap and Wealthify

help our customers make more of their money. TSB also

differentiates itself through the award-winning Fraud Refund

Guarantee scheme.



Emerging risks

The key emerging risks in TSB’s operating environment are described below. TSB regularly considers the likelihood of the

relevant risk materialising and the potential impact on its business strategy, customers, employees and shareholder. These

risks are considered as part of the business planning cycle.

COVID-19 related horizon risks

COVID-19 has generated significant instability and the full impact of the consequential effects is not yet known. The longer-

term effect on market forces and customer behaviours could significantly impact strategy and TSB’s business model. TSB

has a strong liquidity and capital position and ensures this includes sufficient MREL resources, with a buffer to cover

any disruption. The approach to setting TSB’s strategy considers a range of responsive and flexible strategic initiatives

that can be deployed and adjusted as the landscape evolves.

Challenge to attract and retain talent in a competitive market

Demand for highly skilled and experienced employees has resulted in a competitive jobs market. This, together with added

uncertainty over TSB’s future ownership model, could have a negative impact on leadership and attrition, resulting in

challenges with attracting and retaining talent. A number of projects have been established to deliver people, property and

technical solutions and inclusion initiatives and the Board monitors and assesses culture bi-annually. Climate change risk

Climate change presents several physical and transitional risks that need to be effectively identified and managed to

prevent customer harm and adverse financial impacts. In line with PRA and Climate Financial Risk Forum (CFRF)

guidance, climate change is positioned as a cross-cutting TSB risk, impacting a range of risk categories to varying degrees.

TSB has conducted a high-level assessment of the extent to which risk categories are impacted by climate change. The

risk categories expected to be most impacted correlate with the key areas detailed in the CFRF guidance, predominately

credit, financial, market, physical, property, supplier, and disclosure risks.

A full assessment of the impact of climate change risks will be undertaken in early 2021, to support the embedding of

effective risk management actions ahead of the 2021 PRA deadline to fully embed the approach to managing climate-

related financial risks.

TSB’s Chief Risk Officer has accountability for ensuring financial risks of climate-related change are understood and

discussed at Board level, embedded in risk management, and considered in TSB’s strategy. Responsibility for leading

TSB’s consideration of the financial risks arising from climate change and its readiness has been assigned to a dedicated

Steering Group. The activity plan has been structured around the key CFRF themes:

• Risk management – embedding climate change risk into TSB’s governance framework, developing policies for

managing exposure to climate-related financial risks and embedding climate change risk management within the risk

management framework.

• Scenario analysis – use of scenario analysis to inform strategic planning and determine the impact of climate change

financial risks on TSB’s overall risk profile and business strategy.

• Disclosures – development of robust, decision-useful climate change disclosures.

• Innovation – the Climate Related Business Strategy group established under the Do What Matters plan pillar led by

the Chief Operating Officer has responsibility for considering our operational approach to climate change. This includes

understanding our environmental footprint as an organisation, both today and in the future, offering ‘green’ products

designed to have a positive impact on the environment, considering how we can encourage employees to be more

environmentally conscious, and assessing our suppliers’ environmental footprint.

During October 2020, the Chief Risk Officer provided the Board Risk Committee with an update on the progress of TSB’s

response to the PRA’s supervisory statement on enhancing banks’ and insurers’ approaches to managing the financial

risks from climate change (SS3/19), detailing how planning has evolved following updated guidance from the PRA and the

CFRF. A Board workshop is planned for March 2021 to assess progress against developments in industry practice.



Emerging risks (continued)

The principal climate change risks to TSB relates to property collateral for secured lending. These are both physical risks

(such as flooding), and transitional risks (such as affordability impacts on customers from increased energy efficiency

investment requirements). The core mortgage book is the most at risk due to property value, albeit initial assessment has

deemed the current impact as low.

The near-term risks are transitional, relating to energy efficiency, with the possibility of stronger energy performance

regulation over time. As well as an assessment of the existing mortgage book, we have a new valuation tool that assesses

climate change risk at origination and every new property during 2021 will be assessed. We have enhanced our monitoring

with two new risk appetite metrics related to flooding and energy performance of our mortgage book. The Steering Group

will drive action to mitigate any financial impact.

Strategic report on pages 3 to 17 approved, by order of the Board

Keith Hawkins

Company Secretary,

2 February 2021


Directors’ report Introduction

The Directors of TSB Bank plc (the ‘Company’) present their report and audited financial statements for the year ended 31

December 2020, in accordance with section 415 of the Companies Act 2006. The information in the section 172 statement

(pages 7 to 8) on employee engagement and fostering of business relationships with customers, suppliers and others is

incorporated into this Directors’ report. Principal activities and results

The principal activities and review of the Company are set out in the Strategic report on pages 3 to 17. Dividends

The Directors do not currently propose to pay a dividend. Directors

The Directors who served during the year are shown on page 2. Directors’ indemnities

Each of the Directors has the benefit of a deed of indemnity which constitutes a ‘qualifying third party indemnity provision’.

This indemnification for Directors provided by the Company has been arranged in accordance with the Articles and the

Companies Act 2006. With the exception of the Non-executive Directors appointed during 2020, the indemnities were in

place throughout 2020. The indemnity for David Vegara was executed on 28 January 2020, for César González-Bueno on

2 April 2020, for Lynne Peacock on 28 April 2020, for Mark Rennison on 1 August 2020, and for Libby Chambers on

1 October 2020. Each of the indemnities remain in force at the date of signing these financial statements and are available

for inspection at the Company’s registered office. Corporate governance

Although the Company does not have shares with a premium listing on the London Stock Exchange, and does not need

to comply with the UK Corporate Governance Code (Code), the Board has chosen to voluntarily adopt those principles of

the Code that are considered appropriate for the Company. Information on how the Company has applied the Code can

be found starting on pages 28 of the annual report and accounts of the Company’s parent, TSB Banking Group plc, which

is available at www.tsb.co.uk. TSB Banking Group plc’s annual report and accounts also contains further information on

the Company’s governance arrangements including reports from TSB’s Nomination Committee and Audit Committee. Future developments

The development of the Company is set out in the context of the Company’s business model on page 6. Employee information Employee voice and a speak up culture

TSB behaviours provide a framework to enable all TSB employees to feel what customers feel, look for better, say it straight

and do what matters. Collaboration and open, honest, two-way communication is therefore encouraged at all levels. As

employees have adjusted to different ways of working in 2020, TSB has focused on maintaining these channels of

communication to support a speak up culture and maintain connection between individuals and teams, supported by TSB’s

digital workplace. There are regular all employee events hosted by the Chief Executive and other members of the Executive

Committee, and each Executive Committee member also holds conversations within their business areas. TSB’s employee

forum, ‘The Link’, has met seven times in 2020, providing a direct connection between employees and executive

leadership. ‘The Link’ also reports annually to the Board. We also continue to work closely with our recognised unions, Accord and Unite, to build strong relationships and, during

2020, conversations occurred weekly in relation to the health, safety and wellbeing of all employees regarding TSB’s

response to the COVID-19 pandemic. Our annual employee experience survey, ‘Your Say Matters’, provides all employees

the opportunity to feedback on working at TSB, and additional pulse’ surveys have provided timely feedback and insight

into the employee experience in relation to COVID-19 and new ways of working. In 2020, each Executive Committee

member has also begun a reverse mentoring relationship with an employee from a different background to their own,

providing a different perspective and direct connection with individual experiences across TSB. Training and development

We have continued to build a strong development culture at TSB focused across three strategic pillars of Digital, Money

Confidence and Leadership. We launched our investing in people programme in April 2020 and committed, by the end of

2022, to invest more than 100,000 hours of additional formal training on delivering this strategy and an additional 100,000

hours focused on ongoing training including: new to bank induction/training, regulatory and compliance training. So far we

have delivered over 50,000 hours towards the strategic target and a further 60,000 hours in additional training. We have built a robust Money Confidence programme for which we are in the process of obtaining accreditation by the

Chartered Banker Institute. This programme focuses on what is expected of our branch employees and how to have a

highly engaging customer conversation.


Directors’ report (continued) Employee information (continued) Our apprenticeship offering has been amended to reflect our blueprint to become a more data and digitally led bank.

Investment in these programmes has increased by 70% to drive and deliver our primary corporate objectives. TSB’s

apprenticeship levy was used in full in 2020 which is upper quartile within the financial services sector.

The focus on our new performance management approach has been supported by our new Talking Performance module

which brings to life what a performance mindset means at TSB and how it can help us achieve our goals and make the

most of our new performance framework. Managers are integral to the performance management process and a series of

new signature actions have been established to embed the basics of leadership and develop excellence through coaching

with our TSB Manager and Leader as Coach programmes. To support this further, all employees are encouraged to have

a personal development plan.

Recognition and reward

Not only do we give a voice to our employees, but we also encourage the recognition and celebration of their contribution

and behaviours. This is demonstrated by the introduction of our new recognition programme, Spotlight, in partnership with

Achievers. This gives employees the opportunity to recognise exceptional contributions of fellow employees who

demonstrate appropriate TSB behaviours. In the period since Spotlight went live, in July 2020, over 64,000 recognitions

have been received by employees.

TSB’s approach to reward is driven by its core strategy and supports its employees. The approach is considered to be fair,

transparent and consistent for everyone. It includes competitive salary, allowances and benefits plus a single variable pay

award that allows our employees to share consistently in the success of the organisation. This enables all employees to

be rewarded for the important role they play in the success of our business.

Diversity and inclusion

In 2020 TSB published the Do What Matters plan, providing a new framework to support TSB’s existing ambition to create

a truly inclusive workplace. TSB’s commitments are:

1. Creating a TSB for everyone through behaviours and ways of working. TSB is developing an inclusive leadership

approach beginning with bias and mental health awareness training for all TSB line managers to be completed by the

end 2021.

2. Building a diverse and balanced workforce that reflects the customers we serve. TSB maintains a strong commitment

to achieving gender balance. At the time of this report, 40% of senior leaders are female, 42% of Directors are female,

well ahead of the Hampton Alexander Review target of 33%, and 30% of the Executive Committee are female. Building

genuinely diverse teams is critical to the success of our business. In 2020, TSB has also focused on improving the

quality of the diversity data held, enabling a full workforce analysis of disability, ethnicity, sexual orientation, and social

mobility as well as better targeting support for those with caring responsibilities. A set of targets for 2025 has been

established which seeks to ensure the diversity of TSB’s workforce is aligned with that of the UK working age

population. This will allow a more holistic approach to the recruitment, development and engagement of talent and to

build diverse teams. For TSB’s Black, Asian and Minority Ethnic groups this will mean a representation of 14% and

Black ethnic representation of 3% to meet the UK working age population. For disability and LGBT+ initial data

indicates that TSB’s workforce already reflects the wider population. We will seek to maintain this going forward by

continuing to focus on an inclusive culture and monitoring the workforce, including how our hiring and development

practices support social mobility. We will also seek to improve the diversity of our senior leadership population,

maintaining at least 40% of roles held by women, and improving Black, Asian and Minority Ethnic representation to at

least 10%.

3. Putting accessibility at the heart of the approach to inclusion and building confidence to have conversations on mental

health internally and with customers. Employees with disabilities are treated fairly and can compete on equal terms

for career progression. TSB is a Level 2 Disability Confident Employer with a clear action plan to progress to Level 3

Disability Leader status. TSB commits to offer an interview to disabled people who meet the minimum criteria for a job

in terms of the skills needed, thereby giving them the opportunity to present their skills face to face. New training in

the accessibility features of TSB’s digital workplace is evidencing that a more digital workplace can be more

accessible. We’ve also listened to employees with disabilities and long term health conditions on the benefits and

challenges of remote working to help design TSB’s future ways of working. A new Workplace Adjustment passport is

supporting improved conversations around adjustments required by employees (including in relation to training and

career development). In 2020, TSB launched a new digital tool to support all TSB employees to take proactive care of

their mental wellbeing, with one in three employees signed up to use the platform. To support leaders to be confident

to have conversations about wellbeing there is a mental health module included in the TSB Manager Programme.


Directors’ report (continued) Employee information (continued)

Diversity and inclusion (continued)

4. Supporting social mobility in local communities. TSB has participated in the Social Mobility Foundation’s Employer

Index for the first time in 2020, placing in the top 100 employers. This has allowed a full gap analysis and clear roadmap

for 2021 to support social mobility in local communities, including working with the Government’s Kickstart scheme

providing new job placements to young people who are at risk of long-term unemployment in 2021.

TSB also has an active, employee led, intersectional Inclusion Network with executive level sponsors for Disability,

Ethnicity, Gender Balance and LGBT+. In 2020, the Inclusion Network ran an extensive programme of events, including

LGBT History Month, International Women’s Day, Autism awareness, Mental Health awareness, Ramadan, Virtual Pride,

Black History Month and Purple Light Up to further the conversation across TSB to create a truly inclusive workplace.

Supporting our employees during the COVID-19 pandemic

The health and safety of our employees was, and still is, a priority during the COVID-19 pandemic. From March 2020,

steps to provide clear guidance and support to all employees were taken. All non-essential travel was stopped and TSB

adopted Government advice for citizens in a transparent manner. We ensured no financial impact for permanent employees

who needed to self-isolate and allowed employees to take essential (mobile) equipment home in order to maximise

productivity, engagement and the continuation of service to our customers. Our Digital Workplace meant that home working

was enabled quickly and improvements have continued to be made during 2020. 4,500 employees were enabled to work

from home with a peak of 3,500 working fully from home.

For essential workers who continued to travel to TSB locations to maintain essential customer services, precautionary

measures were taken through the provision of personal protective equipment, security guards, increased hygiene protocols

and screens. The pressure of work was alleviated on those in the front line through the redeployment of employees to

support high impact areas (Customer Operations and Business Banking). To say thank you to all those who ensured TSB

was able to serve customers through the initial peak of the pandemic, a £500 award was made to front line employees.

Access to mental health support was integral to our approach. Research by the mental health charity Mind reports that one

in five adults experienced a decline to their mental health during the pandemic. In March 2020, the digital mental wellbeing

platform, UnMind, was launched for all employees to provide easy access to a wide range of scientifically backed tools to

proactively support mental wellbeing. So far, one in three employees have registered and we have recently enabled sharing

of the tool with employees family members and friends.

We also worked to optimise two-way communication, asking all managers to use their one-to-one conversations with each

employee to discuss specific requirements or tailored support. These were supplemented by weekly branch

communications and regular ‘all employee’ calls with members of the Executive Committee. Listening remained as

important as ever. A ‘pulse’ survey in April 2020 asking specific questions about how employees were feeling, and their

reaction to TSB’s initial response. This feedback provided immediate input to decisions around the ongoing response to

the pandemic and input into our future ways of working strategy.

Our response to the pandemic is ongoing as we adapt our approach in reaction to Government advice. We continue to

track and understand employee feelings through our annual engagement survey and work closely with managers and

leaders to ensure adequate support is provided to all employees.

Environmental information

TSB is committed to be a responsible user of resources and continues to consider ways it can reduce its environmental

impact. Total emissions have reduced by 20% compared to 2019 (Scope 1, 2 & 3 in the table below). However, since

October 2019, TSB has purchased all power from renewable sources, resulting in a 66% reduction in operational (Scope

1 and 2) market-based carbon emissions.. Scope 1 and 2 emissions are those that come directly from the activities of

TSB e.g. heating and fleet vehicles (scope 1) and from electricity used by TSB (scope 2). Scope 3 emissions relate to TSB’s

business travel.

TSB seeks to mitigate the environmental impact of its property, and where improvements are required, energy efficient

equipment is chosen. In 2020, TSB completed the refurbishment of its main corporate site in Edinburgh, Henry Duncan

House, investing almost £2 million to reduce energy use by installing new LED lighting and replacing the building’s air

conditioning system. Reduced business travel and use of paper and plastic in TSB’s workplaces has also contributed to

lower carbon emissions.


Directors’ report (continued) Environmental information (continued) The table below shows TSB’s greenhouse gas emissions as required by the UK Streamlined Energy and Carbon Reporting (SECR) Regulations. TSB reports the mandatory emissions as a ‘large organisation’ and has used the data collated to set a strategy towards a net-zero carbon future, including a decarbonisation plan, travel plan and engagement campaign.

The data has been compiled in accordance with the GHG Protocol Corporate Accounting and Reporting Standard, and independently audited by Concept Energy Solutions Limited. Further information on TSB’s methodology can be found at https://www.tsb.co.uk/data-and-methodology-report-2020.pdf.

Summary of Streamlined Energy and Carbon Reporting 2020 2019

Emissions – Location-based(1) in gross tonnes of carbon dioxide equivalent (tCO2e(2)):

Scope 1 emissions:

Combustion of gas(3) 2,601 2,645

Fuel for transport purposes 33 164

Heating oil 61 54

Scope 2 emissions - purchased electricity(3)(4) 5,561 7,139

Total scope 1 and 2 emissions 8,256 10,002

Scope 3 emissions - business travel(5) 221 647

Total emissions 8,477 10,649

Intensity ratio(6) 1.29 1.50

Energy consumption KWH (million) 38.601 43.720 (1) Location-based emissions are those measured using the UK national grid electricity conversion factors, updated annually. (2) tCO2e – carbon dioxide equivalent is the measure of greenhouse gas emissions. (3) Estimated consumption rates, based on consumption rates for previous years, have been used to compile data for a small number of properties where

meter readings were unavailable. (4) Scope 2 emissions (for SECR) include only direct commercial electricity supplies and are location-based. The small amount of domestic or cross

charged consumption from landlords is not included, but TSB are working on improvements for the next reporting period. (5) Emissions from rental cars and employee owned vehicles where TSB is responsible for purchasing the fuel. (6) Calculated as the sum of (SECR) emissions divided by the average number of full time employees of 6,563 (2019: 7,114). TSB has a Renewable Energy Guarantees Origin (REGO) electricity purchase agreement that started in October 2019

which has supported the reduction of greenhouse gas emissions as is show in the table below. TSB are committed to

continuing this source of electricity supply.

TSB greenhouse gas emissions data 2020 2019

Measured using market-based(1) emission factors in gross tCO2e(2):

Total Scope 1 & 2 emissions tCO2e (market-based)(1)(3) 2,761 8,283

Scope 2 emissions – purchased electricity tCO2e (market-based)(1) – 5,274 (1) Market based emissions are those associated with renewable energy supplies which carry a zero-rated emission. (2) tCO2e – carbon dioxide equivalent is the measure of greenhouse gas emissions. (3) Includes additional fugitive emissions (refrigerant gas emissions from air conditioning systems) of 66 tCO2e (2019: 146 tCO2e) not required for SECR,

in Scope 1.

Political donations and expenditure

No amounts were given for political purposes during the year.

Financial instruments

Information on financial risk management objectives and policies in relation to the use of financial instruments can be found

starting on page 54 of the financial statements.

Principal risks and uncertainties

The principal risks and uncertainties faced by the Company are set out starting on page 13.

Post balance sheet events

There are no significant events affecting the Company that have arisen between 31 December 2020 and the date of this

report that require disclosure.

Research and development activities

The Company develops new products and services during the ordinary course of business.

Overseas branches

The Company does not have any branches outside of the United Kingdom.

Registered office

The registered office address for TSB Bank plc is Henry Duncan House, 120 George Street, Edinburgh, EH2 4LH.

https://www.tsb.co.uk/data-and-methodology-report-2020.pdf


Directors’ report (continued) Appointment of external auditor

Following the tender process conducted in 2018, the audit of the 2020 financial statements is the first to have been

undertaken by KPMG. Pamela McIntyre was the senior statutory auditor for the audit of the 2020 financial statements. A

resolution to re-appoint KPMG for the audit of the financial statements for the year ending 31 December 2021 will be

proposed at the 2021 Annual General Meeting. Disclosure of information to external auditors

In accordance with the provisions of the Companies Act 2006, the Directors serving at the date of approval of this report

confirm that, so far as each Director is aware, there is no relevant audit information of which the Company’s auditors are

unaware and each Director has taken all the steps that he or she ought to have taken as a Director to make himself or

herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Going concern

The Directors recognise their responsibility to make an assessment of the Company’s ability to continue as a going

concern, for a period of at least 12 months from the date the financial statements are approved. The Directors, having

taken into account the matters noted in the ‘Basis of Preparation’ on page 23, are satisfied that adequate funding, liquidity

and capital resources will be in place to allow the financial statements to continue being prepared on a going concern basis

and are not aware of any material uncertainties that may cast significant doubt upon TSB’s ability to continue as a going

concern. Viability assessment

The Directors’ assessments of viability and principal and emerging risks can be found on page 48 of the annual report and

accounts of the Company’s parent, TSB Banking Group plc, under the heading ‘viability statement.’ Statement of directors' responsibilities in respect of the financial statements

The Directors are responsible for preparing the annual report and the consolidated (Bank) and Company financial

statements in accordance with applicable law and regulations. Company law requires the Directors to prepare the Bank and Company financial statements for each financial year. Under

that law they are required to prepare the consolidated financial statements in accordance with international accounting

standards in conformity with the requirements of the Companies Act 2006 and applicable law and have elected to prepare

the Company financial statements on the same basis. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true

and fair view of the state of affairs of the Bank and of the Company and of the Bank’s profit or loss for that period. In

preparing each of the Bank and Company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable, relevant and reliable;

• state whether they have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006;

• assess the Bank and Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

• use the going concern basis of accounting unless they either intend to liquidate the Bank or the Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the

Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and

enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such

internal control as they determine is necessary to enable the preparation of financial statements that are free from material

misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open

to them to safeguard the assets of the consolidated group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic report and a Directors’

report that complies with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the

Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ

from legislation in other jurisdictions. By order of the Board

Keith Hawkins

Company Secretary,

2 February 2021


Financial statements

Basis of preparation

These consolidated financial statements of TSB Bank plc comprise the results of the TSB Bank plc (the ‘Company’), a

public limited company limited by shares, consolidated with those of its subsidiaries (together the ‘Bank’). Details of

subsidiary undertakings are provided in note 25 to the financial statements on page 72. These consolidated financial

statements have been prepared in accordance with international accounting standards in conformity with the requirements

of the Companies Act 2006.

The consolidated financial statements have been prepared under the historical cost convention as modified by the

recognition of certain financial assets and financial liabilities, including derivative contracts at fair value through profit or

loss and financial assets at fair value through other comprehensive income.

Going concern

The going concern basis is dependent on maintaining enough capital and funding of the balance sheet. The directors

considered a number of factors including the projections for TSB and its capital and liquidity position. TSB’s business

activities and objectives, together with the factors likely to affect its future development, performance and position are set

out in the Strategic report. A loss before tax for the year of £200.5 million (2019: £45.4 million profit) has been reported.

Despite this loss, TSB continues to be in compliance with, and exceeds, its regulatory capital and liquidity requirements.

The Directors have also prepared detailed forecasts which show that a surplus over total capital requirements is forecast

to be maintained, as is compliance with minimum liquidity ratios.

As part of those forecasts, the Directors have modelled the impact of a severe but plausible downside stress in line with

the ‘low rate’ severe downside scenario described in note 9, updated to take into account the Bank of England stress

scenario published in January 2021. Based on the forecasts and stresses performed, the Directors are satisfied that TSB

will have sufficient regulatory capital and liquidity for a period of at least 12 months from the date of approval of these

financial statements. Accordingly they continue to adopt the going concern basis in preparing the financial statements.

Accounting policies

The significant accounting policies used in the preparation of the consolidated financial statements are consistent with

those applied in 2019 with the exception of the early adoption of ‘Interest Rate Benchmark Reform – Phase 2’ (the Phase

2 Amendment) as described under ‘IBOR reform’ in note 22. The accounting policies are presented in a manner consistent

with TSB’s business model and are included in the relevant sections of the consolidated financial statements. In addition,

the following accounting policies relate to the consolidated financial statements as a whole.

Consolidation - Subsidiaries are all entities (including special purpose entities) over which the Company has control. The

Company controls an entity when it is exposed to, or has rights to variable returns from its involvement with the entity and

has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on

which control is transferred to the Bank and are deconsolidated from the date that control ceases. Inter-company

transactions, balances and unrealised gains and losses on transactions between the Bank companies are eliminated.

Foreign currency translation - Foreign currency transactions are translated using the exchange rates prevailing at the date

of the transaction. Monetary items denominated in foreign currencies are translated at the rate prevailing at the balance

sheet date. Foreign exchange gains and losses resulting from the restatement and settlement of such transactions are

recognised in other operating income in the income statement.

Significant accounting estimates and judgements

The preparation of financial statements in accordance with IFRS requires management to make judgements, estimates

and assumptions in applying the accounting policies that affect the reported amounts of assets, liabilities, income and

expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based

upon amounts which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and

are based on historical experience and other factors, including expectations of future events that are believed to be

reasonable under the circumstances.

The significant judgements made by management in applying accounting policies and the key sources of estimation

uncertainty in these consolidated financial statements, which together are deemed critical to the results and financial

position, are presented within the relevant note disclosures.


Index to the consolidated financial statements The Bank’s primary consolidated financial statements are presented on pages 25 to 78. The notes to these consolidated

financial statements are structured to follow the Bank’s business model as set out on page 6 and are listed below.

Sources of funding

1 Customer deposits

2 Debt securities in issue

3 Subordinated liabilities

4 Fair value of financial liabilities

Loans and liquid assets

5 Debt securities

6 Loans to credit institutions

7 Loans and advances to customers

8 Other advances

9 Allowance for credit impairment losses on financial assets at amortised cost

10 Fair value of financial assets

Income

11 Net interest income

12 Net fee and commission income

13 Other operating income

Charges

14 Operating expenses

15 Directors’ emoluments

16 Share-based payments

17 Taxation

18 Deferred tax assets

Managing financial risk

19 Credit risk

20 Liquidity risk

21 Capital resources

22 Market risk

Other important disclosures

23 Shareholder’s equity

24 Contingent liabilities

25 Related party transactions

26 Property and equipment

27 Lease liabilities

28 Intangible assets

29 Other assets

30 Provisions

31 Other liabilities

32 Notes to the consolidated cash flow statement

33 Restatement – Company only

34 Approval of the financial statements


Balance sheets as at 31 December 2020

Bank

(Consolidated)

Bank

(Consolidated) Company Company

Note

2020

£ million

2019

£ million

2020

£ million

2019

Restated(1)

£ million

Assets

Financial assets at amortised cost:

Cash, cash balances at central banks and other demand deposits 5,056.3 4,592.8 5,056.3 4,592.8

Reverse repurchase agreements – 201.1 – 201.1

Debt securities 5 1,123.7 548.6 1,123.7 548.6

Loans and advances to customers 7 33,317.9 31,075.8 33,317.9 31,075.8

Loans to credit institutions 6 43.3 373.2 – –

Loans to central banks 120.9 96.1 120.9 96.1

Other advances 8 217.5 279.6 217.5 279.6

Financial assets at fair value through other comprehensive income

Debt securities 1,496.9 1,587.4 1,496.9 1,587.4

Financial assets at fair value through profit or loss

Derivative financial assets not in hedge accounting relationships 22 198.3 111.5 198.3 126.2

Hedging derivative financial assets 22 139.9 93.4 139.9 49.8

Fair value adjustments for portfolio hedged risk 22 80.2 20.5 80.2 20.5

Property and equipment 26 258.9 293.2 258.9 293.2

Intangible assets 28 49.5 20.3 49.5 20.3

Deferred tax assets 18 144.5 96.1 144.5 92.1

Other assets 29 174.6 146.3 217.8 146.3

Total assets 42,422.4 39,535.9 42,422.3 39,129.8

Liabilities

Financial liabilities at amortised cost:

Customer deposits 1 34,375.3 30,182.4 34,375.3 30,182.4

Borrowings from central banks 3,065.8 4,483.5 3,065.8 4,483.5

Debt securities in issue 2 1,699.2 1,676.3 1,699.2 1,249.8

Subordinated liabilities 3 391.3 395.9 391.3 395.9

Lease liabilities 27 123.3 141.8 123.3 141.8

Other financial liabilities 51.6 80.7 51.6 80.7

Financial liabilities at fair value through profit or loss:

Derivative financial liabilities not in hedge accounting relationships 22 299.7 127.9 299.7 127.9

Hedging derivative financial liabilities 22 225.2 288.5 225.2 288.5

Fair value adjustments for portfolio hedged risk 22 117.0 52.2 117.0 52.2

Provisions 30 153.1 51.8 153.1 51.8

Other liabilities 31 196.0 154.1 195.9 163.6

Total liabilities 40,697.5 37,635.1 40,697.4 37,218.1

Equity

Share capital 23 79.4 79.4 79.4 79.4

Share premium 23 195.6 195.6 195.6 195.6

Other reserves 23 412.8 412.8 412.8 412.8

Retained profits brought forward 23 1,201.9 1,175.7 1,212.6 1,169.1

(Loss)/profit attributable to the shareholder for the current year 23 (156.2) 26.2 (166.9) 43.5

Fair value reserve 23 11.6 13.6 11.6 13.6

Cash flow hedging reserve 23 (20.2) (2.5) (20.2) (2.3)

Shareholder’s equity 1,724.9 1,900.8 1,724.9 1,911.7

Total equity and liabilities 42,422.4 39,535.9 42,422.3 39,129.8 (1) Restated as described in note 33.

The accompanying notes are an integral part of the consolidated financial statements. No statement of comprehensive income has been

shown for the Company, as permitted by section 408 of the Companies Act 2006. The consolidated and Company financial statements

on pages 23 to 78 were approved by the Board of Directors on 2 February 2021 and signed on its behalf by:

Debbie Crosbie Ralph Coates Chief Executive Chief Financial Officer


Consolidated statement of comprehensive income for the year ended 31 December 2020

Bank Bank

Income statement: Note

2020

£ million

2019

£ million

Interest and similar income:

Interest income calculated using the effective interest method 11 922.0 1,050.6

Other interest income 11 (41.0) (5.8)

Total interest and similar income 881.0 1,044.8

Interest and similar expense 11 (94.6) (203.7)

Net interest income 11 786.4 841.1

Fee and commission income 12 122.4 159.8

Fee and commission expense 12 (36.5) (41.5)

Net fee and commission income 12 85.9 118.3

Net gains/(losses) on financial assets and liabilities:

Gains on derecognition of financial assets measured at fair value through

other comprehensive income 21.8 24.6

Losses on derivative financial assets at fair value through profit or loss (1.3) (15.3)

Gains from hedge accounting 22 5.8 20.8

Losses on derecognition of non-financial assets (3.5) (3.5)

Other operating income 13 37.8 1.2


Total income 932.9 987.2

Total operating expenses 14 (969.4) (881.3)

Operating (loss)/profit before impairment losses and taxation (36.5) 105.9

Impairment losses on financial assets at amortised cost 9 (162.7) (60.9)

Impairment (losses)/credit on loan commitments 30 (1.3) 0.4

Total impairment losses (164.0) (60.5)

(Loss)/profit before taxation (200.5) 45.4

Taxation 17 44.3 (19.2)

(Loss)/profit for the year 23 (156.2) 26.2

Other comprehensive (loss)/profit:

Items that may be subsequently reclassified to profit or loss:

Change in fair value reserve:

Change in fair value 14.8 17.3

Transfers to the income statement (17.0) (24.6)

Taxation thereon 18 0.2 2.3

23 (2.0) (5.0)

Change in cash flow hedging reserve:

Change in the fair value of derivatives in cash flow hedges (21.5) (24.4)

Transfers to the income statement (2.9) 24.4

Taxation thereon 18 6.7 0.7

23 (17.7) 0.7

Other comprehensive loss for the year, net of taxation (19.7) (4.3)

Total comprehensive (loss)/income for the year (175.9) 21.9

The accompanying notes are an integral part of the consolidated financial statements.


Statements of changes in equity for the year ended 31 December 2020

Bank (consolidated)

Share

capital

£ million

Share

premium

£ million

Merger

reserve

£ million

Fair value

reserve

£ million

Cash flow

hedging

reserve

£ million

Retained

profit

£ million

Shareholder’s

equity

£ million

Balance at 1 January 2019 79.4 195.6 412.8 18.6 (3.2) 1,175.7 1,878.9

Comprehensive income/(loss):

Profit for the year – – – – – 26.2 26.2

Other comprehensive (loss)/income – – – (5.0) 0.7 – (4.3)

Total comprehensive (loss)/income – – – (5.0) 0.7 26.2 21.9

Balance at 31 December 2019 79.4 195.6 412.8 13.6 (2.5) 1,201.9 1,900.8

Comprehensive loss:

Loss for the year – – – – – (156.2) (156.2)

Other comprehensive loss – – – (2.0) (17.7) – (19.7)

Total comprehensive loss – – – (2.0) (17.7) (156.2) (175.9)


Company

Share capital

£ million

Share

premium

£ million

Merger

reserve

£ million

Fair value

reserve

£ million

Cash flow

hedging

reserve

£ million

Retained

profit

£ million

Shareholder’s

equity

£ million

At 31 December 2018 79.4 195.6 412.8 18.6 (2.5) 1,175.7 1,879.6

Restatement(1) – – – – – (6.6) (6.6)

At 1 January 2019 - restated 79.4 195.6 412.8 18.6 (2.5) 1,169.1 1,873.0

Comprehensive profit:

Profit for the year – – – – – 26.2 26.2

Restatement(1) – – – – – 17.3 17.3

Profit for the year – restated – – – – – 43.5 43.5

Other comprehensive (loss)/income – – – (5.0) 0.2 – (4.8)

Total comprehensive (loss)/income – – – (5.0) 0.2 43.5 38.7


Comprehensive loss:

Loss for the year – – – – – (166.9) (166.9)

Other comprehensive loss – – – (2.0) (17.9) – (19.9)

Total comprehensive loss – – – (2.0) (17.9) (166.9) (186.8)

Balance at 31 December 2020 79.4 195.6 412.8 11.6 (20.2) 1,045.7 1,724.9 (1) Restated as described in note 33.



Cash flow statements for the year ended 31 December 2020

Bank

(Consolidated)

Bank

(consolidated) Company Company

Note

2020

£ million

2019*

£ million

2020

£ million

2019

Restated(1)

£ million

Cash flows from operating activities

(Loss)/profit before taxation (200.5) 45.4 (215.2) 69.1

Adjustments for:

Change in operating assets and liabilities 32 2,255.6 (596.3) 1,897.0 (637.9)

Non-cash and other items 32 264.6 170.1 207.3 190.3

Taxation /received – 20.5 – 20.5

Net cash used in operating activities 2,319.7 (360.3) 1,889.1 (358.0)

Cash flows from investing activities

Purchase of property and equipment (30.2) (18.0) (30.2) (18.0)

Purchase and development of intangible assets (35.9) (7.6) (35.9) (7.6)

Purchase of debt securities (1,341.3) (994.9) (1,341.3) (994.9)

Sale of debt securities 977.8 1,424.3 977.8 1,424.3

Net cash (used in)/provided by in investing activities (429.6) 403.8 (429.6) 403.8

Cash flows from financing activities

Repayments of borrowing from central banks (1,410.0) (1,995.0) (1,410.0) (1,995.0)

Issue of debt securities in issue 450.0 750.0 450.0 750.0

Repayment of debt securities in issue (440.2) (177.5) – –

Repayments of repurchase agreements – (1,084.5) – (1,084.5)

Net securitisation funding – – (9.7) (179.8)

Lease payments (26.4) (38.8) (26.4) (38.8)

Net cash used in financing activities (1,426.6) (2,545.8) (996.1) (2,548.1)

Change in cash and cash equivalents 463.5 (2,543.1) 463.5 (2,543.1)

Cash and cash equivalents at 1 January 32 4,592.8 7,135.9 4,592.8 7,135.9

Cash and cash equivalents at 31 December 32 5,056.3 4,592.8 5,056.3 4,592.8 (1) Restated as described in note 33. Comparative information for 2019 has also been reclassified to align with the current year presentation. This has resulted

in interest received on debt securities of £53.2 million and interest paid on borrowings from central banks, debt securities in issue and subordinated liabilities of £(94.0) million being reclassified from investing activities and financing activities, respectively, and presented in net cash used in operating activities.



Notes to the financial statements Sources of funding

Money deposited by customers into their bank and savings accounts provides the majority of the funds we use

to support lending to customers. We also raise funds from other sources, including wholesale markets, that

diversify our funding profile. Our shareholder also provides some funding in the form of debt and equity capital.

Accounting policies relevant to sources of funding

(a) Financial liabilities

Financial liabilities include customer deposits, deposits from credit institutions, borrowings from central banks, debt

securities in issue, subordinated liabilities, other financial liabilities and derivative financial liabilities (see accounting policy

(j) under Managing financial risk).

Financial liabilities which are not derivatives are measured at amortised cost. Issues of financial liabilities measured at

amortised cost are recognised on the date that the Bank becomes a party to the contractual provisions of the instrument.

A financial liability is derecognised from the balance sheet when the Bank has discharged its obligations, the contract is

cancelled or the contract expires, or where the terms of the debt instrument have been significantly modified.

Borrowings (which include deposits from credit institutions, customer deposits, debt securities in issue and subordinated

liabilities) are recognised initially at fair value, being their issue proceeds net of transaction costs incurred. These

instruments are subsequently stated at amortised cost using the effective interest rate method.

1. Customer deposits

Bank Bank Company Company

2020

£ million

2019*

£ million

2020

£ million

2019

£ million

Bank accounts 13,235.6 10.860.9 13,235.6 10.860.9

Instant access saving deposits 16,209.8 14,952.8 16,209.8 14,952.8

Deposits with agreed maturity 2,454.5 2,934.5 2,454.5 2,934.5

Business banking deposits 2,475.4 1,434.2 2,475.4 1,434.2

Total customer deposits 34,375.3 30,182.4 34,375.3 30,182.4

2. Debt securities in issue

2020

Bank

Balance at 1

Jan 2020

£ million

(Repayments)/

Issues

£ million

Exchange

rate and

other

adjustments

£ million

Balance at

31 Dec 2020

£ million

Securitisation programmes:

Duncan Funding 2015-1 plc 355.7 (369.0) 13.3 –

Duncan Funding 2016-1 plc 70.8 (71.2) 0.4 –

426.5 (440.2) 13.7 –

Covered bond programme:

Series 2017-1 Covered Bonds 498.9 – 0.1 499.0

Series 2019-1 Covered Bonds 750.9 – (0.8) 750.1

1,249.8 – (0.7) 1,249.1

Senior unsecured debt securities – 450.0 0.1 450.1

Total debt securities in issue 1,676.3 9.8 13.1 1,699.2

2019

Bank

Balance at 1

Jan 2019

£ million

(Repayments)/

Issues

£ million

Exchange

rate and

other

adjustments

£ million

Balance at

31 Dec 2019

£ million

Securitisation programmes:

Duncan Funding 2015-1 plc 418.6 (48.2) (14.7) 355.7

Duncan Funding 2016-1 plc 205.6 (129.3) (5.5) 70.8

624.2 (177.5) (20.2) 426.5

Covered bond programme:

Series 2017-1 Covered Bonds 498.4 0.5 498.9


Total debt securities in issue 1,122.6 572.5 (18.8) 1,676.3


Notes to the financial statements Sources of funding (continued) 2. Debt securities in issue (continued)

Bank Date of issue

31 Dec 2020

£ million

31 Dec 2019

£ million

Interest rate at

31 Dec 2020 Maturity date

Issue

currency

Issuing entity

Duncan Funding 2015-1 plc 11/2015 – 101.5 n/a 09/2020 GBR

Duncan Funding 2015-1 plc 11/2015 – 254.2 n/a 09/2020 EUR

Duncan Funding 2016-1 plc 05/2016 – 15.8 n/a 07/2020 EUR

Duncan Funding 2016-1 plc 05/2016 – 55.0 n/a 07/2020 GBR

TSB Bank plc – covered bonds 12/2017 499.0 498.9 0.42% 12/2022 GBR


TSB Bank plc – senior unsecured debt securities 12/2020 450.1 – 2.15% 06/2023 GBR

Total debt securities in issue 1,699.2 1,676.3

Company

Balance at

1 Jan 2020

£ million

Issues/

(Repayments)

£ million

Exchange

rate and

other

adjustments

£ million

Balance at

31 Dec 2020

£ million

Series 2017-1 Covered Bonds 498.9 – 0.1 499.0

Series 2019-1 Covered Bonds 750.9 – (0.8) 750.1

Senior unsecured debt securities – 450.0 0.1 450.1

Total debt securities in issue 1,249.8 450.0 (0.6) 1,699.2

Company

Balance at

1 Jan 2019

£ million

Issues/

(Repayments)

£ million

Exchange

rate and

other

adjustments

£ million

Balance at

31 Dec 2019

£ million


Series 2019-1 Covered Bonds – 750.0 0.9 750.9

Total debt securities in issue 498.4 750.0 1.4 1,249.8

Company Date of issue

31 Dec 2020

£ million

31 Dec 2019

£ million

Interest rate at

31 Dec 2020 Maturity date

Issue

currency

Issuing entity



TSB Bank plc – senior unsecured debt securities 12/2020 450.1 – 2.15% 06/2023 GBR

Total debt securities in issue 1,699.2 1,249.8

Securitisation programmes

During 2020, all securitisation notes issued under the Bank’s securitisation programmes matured. At 31 December 2019,

loans and advances to customers included loans securitised under these securitisation programmes, the majority of which

had been sold to bankruptcy remote structured entities. As the structured entities were funded by the issue of debt on

terms whereby the majority of the risks and rewards of the portfolio were retained by the Bank, the structured entities were

consolidated fully and all of these loans were retained on the Bank’s balance sheet, with the externally issued notes in

issue included within debt securities in issue. The balances of the advances subject to these arrangements and the carrying

value of the notes in issue at 31 December 2019 are listed below.

31 December 2019

Bank

Loans and

advances

securitised(1)

£ million

Liability

£ million

Duncan Funding 2015-1 plc 1,191.7 1,293.5

Duncan Funding 2016-1 plc 2,086.6 2,241.7

3,278.3 3,535.2

Less retained notes held by the Bank (3,108.7)

Total securitisation notes 426.5

(1) Due to the nature of the securitisation programmes, cash arising from mortgage repayments was retained for periods of time before being invested in

replacement mortgage assets or being distributed to note holders.


Notes to the financial statements Sources of funding (continued) 2. Debt Securities in issue (continued)

Securitisation programmes (continued)

Cash deposits of £342.5 million (note 6) held by the Bank at 31 December 2019 were restricted in use to repayment of the

debt securities issued by the structured entities and other legal obligations. The Bank recognised the full liabilities

associated with its securitisation programmes within debt securities in issue, although the obligations of the Bank are

limited to the cash flows generated from the underlying assets.

Covered bond programmes

Loans and advances to customers of £1,815.0 million (2019: £1,802.2 million) have been assigned to a limited liability

partnership to provide security for the issuance of covered bonds of £1,249.1 million (2019: £1,249.8 million) by the Bank.

The Bank retains all of the risks and rewards associated with these loans and the partnership is consolidated fully with the

loans retained on the Bank’s balance sheet, and the related covered bonds in issue included within debt securities in issue.

Cash deposits of £43.3 million (2019: £30.7 million) held by the Bank are restricted in use to repayment of the term

advances related to covered bonds and other legal obligations (note 6). At 31 December 2020, the Bank had

over-collateralised the covered bond programmes in order to: meet the programme terms; secure the rating of the covered

bonds; and to provide operational flexibility. The obligations of the Bank to provide collateral may increase due to the formal

requirements of the programmes. The Bank may also voluntarily contribute collateral to support the ratings of the covered

bonds but did not do so during 2020 or 2019. During 2020 and 2019, there were no defaults on any principal or interest or

any other breaches with respect to borrowings under the covered bond programmes.

IBOR reform

In July 2020, the terms of £500.0 million of covered bonds, where interest was calculated based on LIBOR, were modified

to use SONIA from the September 2020 interest reset date and thereafter. This was undertaken on an economically

equivalent basis as at the date of the modification and the covered bonds continue to be recognised on the balance sheet

with no modification gain or loss being recognised. At 31 December 2020, all covered bonds issued by TSB reference

SONIA to determine the rate of interest payable on notes issued.

Senior unsecured debt securities in issue

In December 2020, the Company issued £450.0 million floating rate notes due to mature in June 2023 to its parent

company, TSB Banking Group plc, to satisfy MREL requirements. These were issued at a price of 100% of the principal

amount. The notes pay interest at SONIA plus 2.1% payable quarterly in arears. The Company has the option to redeem

these notes in June 2022 and quarterly thereafter, subject to approval of the PRA.

3. Subordinated liabilities


2020

£ million

2019

£ million

2020

£ million

2019

£ million

Fixed/floating rate reset callable subordinated Tier 2 notes due May 2026 385.0 385.0 385.0 385.0

Unamortised discount (0.1) (0.4) (0.1) (0.4)

Accrued interest 3.4 3.4 3.4 3.4

Fair value hedge accounting adjustment (note 23) 3.0 7.9 3.0 7.9

Total subordinated liabilities 391.3 395.9 391.3 395.9

The Company issued, in 2014, £385.0 million of fixed/floating rate reset callable subordinated Tier 2 notes at an issue price

of 99.493% of the principal amount to TSB Banking Group plc. The notes pay interest at a rate of 5.75% per annum,

payable semi-annually in arrears until 6 May 2021 at which time the interest rate becomes 3 month LIBOR plus 3.43% per

annum payable quarterly in arrears. The Company has the option to redeem these notes on 6 May 2021 and quarterly

thereafter, subject to approval of the PRA.


Notes to the financial statements

Sources of Funding (continued)

4. Fair value of financial liabilities

The following table summarises the carrying values, fair values, and valuation hierarchy of financial liabilities. The fair

values presented in the table are at a specific date and may be significantly different from the amount which will actually

be paid on the maturity or settlement date.

2020 2019

Bank

Note

Carrying

value

£ million

Fair

value

£ million

Carrying

value

£ million

Fair

value

£ million

Financial liabilities

Customer deposits 34,375.3 34,405.2 30,182.4 30,214.6

Debt securities in issue 1,699.2 1,717.2 1,676.3 1,684.4

Subordinated liabilities 391.3 394.0 395.9 398.3

Derivative liabilities at fair value through profit or loss 299.7 299.7 127.9 127.9

Hedging derivative liabilities 225.2 225.2 288.5 288.5

2020 2019

Company

Note

Carrying

value

£ million

Fair

value

£ million

Carrying

value

£ million

Fair

value

£ million

Financial liabilities

Customer deposits 34,375.3 34,405.2 30,182.4 30,214.6

Debt securities in issue 1,699.2 1,717.2 1,249.8 1,257.3

Subordinated liabilities 391.3 394.0 395.9 398.3

Derivative liabilities at fair value through profit or loss 299.7 299.7 127.9 127.9

Hedging derivative liabilities 225.2 225.2 288.5 288.5

The carrying amount of borrowings from central banks, deposits from credit institutions, and other financial liabilities is a

reasonable approximation of fair value, as these balances are either on demand or variable rate. Fair value is the price

that would be paid to transfer a liability (or sell an asset) in an orderly transaction between market participants at the

measurement date.

The fair value of customer deposits repayable on demand is considered to be equal to their carrying value given they are

short term in nature. The fair value for all other customer deposits is estimated using discounted cash flows applying either

market rates, where applicable, or current rates for deposits of similar remaining maturities. The Bank’s subordinated

liabilities and derivative financial liabilities are primarily valued using discounted cash flows where the most significant input

is interest yield curves developed from publicly quoted rates and by reference to instruments with risk characteristics similar

to those held by the Bank. Derivative financial instruments are the only financial liabilities of the Bank that are carried at

fair value.

Valuation hierarchy of financial instruments

Financial instruments carried at fair value, or for which fair values are disclosed, have been classified into three levels

according to the quality and reliability of information used to determine the fair values.

Level 1 - Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical

assets or liabilities.

Level 2 - Level 2 valuations are those where quoted market prices are not available, for example where the instrument is

traded in a market that is not considered to be active or valuation techniques are used to determine fair value and where

these techniques use inputs that are based significantly on observable market data.

Level 3 - Level 3 portfolios are those where at least one input which could have a significant effect on the instrument’s

valuation is not based on observable market data.


Notes to the financial statements Sources of Funding (continued)

4. Fair value of financial liabilities (continued)

The table below analyses the fair values of the Bank’s financial liabilities between valuation hierarchies. There were no

transfers between levels in 2020 or 2019.

Bank

Level 1

£ million

Level 2

£ million

Level 3

£ million

Total fair

value

£ million

Total carrying

value

£ million

At 31 December 2020

Customer deposits – 34,405.2 – 34,405.2 34,375.3

Debt securities in issue 1,267.1 450.1 – 1,717.2 1,699.2

Subordinated liabilities – 394.0 – 394.0 391.3

Derivative liabilities at fair value through profit or loss – 299.7 – 299.7 299.7

Hedging derivative liabilities – 225.2 – 225.2 225.2

At 31 December 2019


Debt securities in issue 1,684.4 – – 1,684.4 1,676.3


Derivative liabilities at fair value through profit or loss 127.9 – 127.9 127.9

Hedging derivative liabilities 288.5 – 288.5 288.5

The table below analyses the fair values of the Company’s financial liabilities.

Company

Level 1

£ million

Level 2

£ million

Level 3

£ million

Total fair

value

£ million

Total carrying

value

£ million

At 31 December 2020


Debt securities in issue 1,267.1 450.1 – 1,717.2 1,699.2


Derivative liabilities at fair value through profit or loss – 299.7 – 299.7 299.7

Hedging derivative liabilities – 225.2 – 225.2 225.2

At 31 December 2019


Debt securities in issue 1,257.3 – – 1,257.3 1,249.8


Derivative liabilities at fair value through profit or loss 127.9 – 127.9 127.9

Hedging derivative liabilities 288.5 – 288.5 288.5


Notes to the financial statements Loans and liquid assets

Funds deposited with the Bank are primarily used to support lending to customers. The Bank lends money to

customers using different products, including mortgages, credit cards, unsecured personal loans and overdrafts.

A portion of the funds are held in reserve – we call that our liquidity portfolio, which enables the Bank to meet

unexpected future funding requirements.

Accounting policies effective for the year ended December 2020

(b) Classification and measurement of financial assets

Financial assets is the term used to describe the Bank’s loans to customers and other institutions. It includes loans and

advances to customers, credit institutions and central banks, financial assets at fair value through other comprehensive

income, cash and balances with central banks and other demand deposits, derivative financial assets (see accounting

policy (j) under Managing financial risk), and other advances. A financial asset is recognised on the balance sheet when

the cash is advanced to the borrower, or in the case of purchases of debt securities, on the settlement date.

Classification and measurement

On initial recognition, financial assets are classified into one of three measurement categories, amortised cost, fair value

through other comprehensive income, or fair value through profit or loss depending on the Bank’s business model for

managing the financial assets and whether the cash flows represent solely payments of principal and interest.

The Bank assesses its business models at a portfolio level based on its objectives for the relevant portfolio, how

performance of the portfolio is measured and reported, how management are compensated and the frequency and the

reasons for asset sales from the portfolio. The Bank reclassifies financial assets only when its business model for

managing the portfolio of assets changes.

Financial assets that are debt instruments measured at amortised cost

Financial assets in portfolios where the business model is to hold the assets to collect the contractual cash flows and where

those cash flows represent solely payments of principal and interest are measured at amortised cost. Cash flows are

considered to represent solely payments of principal and interest where they are consistent with a basic lending

arrangement. Where the contractual cash flows introduce exposures to risk or volatility unrelated to a basic lending

arrangement, such as from changes in equity prices, the cash flows are not considered to be solely payments of principal

and interest.

Financial assets measured at amortised cost are initially recognised when the cash is advanced to the borrower at fair

value including transaction costs. Subsequent measurement is at amortised cost, using the effective interest rate method.

Amortised cost is the amount at which a financial asset is initially recognised, minus principal repayments, plus or minus

the unamortised amount of any difference between the initial amount recognised and the maturity amount, calculated using

the effective interest rate method. The carrying amount of these assets is adjusted by an expected credit loss allowance.

Financial assets that are debt instruments measured at fair value through other comprehensive income (FVOCI)

Financial assets in portfolios where the business model is to hold the assets to collect the contractual cash flows and to

generate cash flows from selling assets are measured at fair value including transaction costs. Where the cash flows

represent solely payments of principal and interest, gains and losses arising from changes in fair value are recognised

directly in other comprehensive income. When the financial asset is either sold or matures, the cumulative gain or loss

previously recognised in other comprehensive income is recognised in the income statement. Interest income is calculated

using the effective interest method and is recognised in the income statement in net interest income. Foreign exchange

gains and losses on financial assets denominated in foreign currencies are recognised in the income statement in

exchange gains or losses. Impairment losses are recognised in the income statement.

Financial assets measured at fair value through profit or loss (FVPL)

Financial assets that do not meet the criteria for amortised cost or FVOCI are measured at fair value on initial recognition

and subsequently. Fair value gains and losses are recognised in the income statement within other income. Derivative

financial assets are measured at FVPL (see accounting policy (j) under Managing financial risk). All equity instruments are

measured at FVPL with dividends continuing to be recognised in other income in the income statement.


Notes to the financial statements Loans and liquid assets (continued)

Accounting policies effective for the year ended December 2020 (continued)

(c) Impairment of financial assets

The impairment requirements of IFRS 9 apply to financial assets measured at amortised cost and debt instruments

measured at FVOCI. At initial recognition, an impairment allowance is required for expected credit losses (ECL) resulting

from default events expected within the next 12 months (12 month ECL). In the event of a significant increase in credit risk,

allowance is required for ECL resulting from default events expected over the estimated life of the financial instrument

(lifetime ECL). IFRS 9 requires the financial asset to be allocated to one of the following three ‘stages’: ➢ Stage 1 - Financial assets which have not experienced a significant increase in credit risk since they were originated.

Recognition of a 12 month ECL is required. Interest income on stage 1 financial assets is calculated on the gross

carrying amount of the financial asset; ➢ Stage 2 – Financial assets which have experienced a significant increase in credit risk since initial recognition. For

financial assets in stage 2, recognition of a lifetime ECL impairment allowance is required. Interest income on stage

2 financial assets is calculated on the gross carrying amount of the financial asset; and ➢ Stage 3 - Financial assets which have experienced one or more events that have had a detrimental impact on the

estimated future cash flows and are considered to be credit impaired. Like stage 2, recognition of a lifetime expected ECL impairment allowance is required. However, interest income on stage 3 loans is calculated on the financial asset balance net of the impairment allowance.

Financial assets that are credit impaired at the date of their purchase or origination will be reported in a separate ‘purchased or originated as credit impaired’ (POCI) category until the loan is derecognised. The cumulative change in lifetime expected credit loss since the purchase or origination of the financial asset is recognised as a loss allowance. Definition of default for IFRS 9

Loans and advances that are more than 90 days past due, or considered by management as unlikely to pay their

obligations, are considered to be in default and credit impaired (stage 3) for IFRS 9. Examples of loans considered unlikely

to pay include customers in bankruptcy or subject to an individual voluntary arrangement, customers undergoing

repossession, and customers who have received a forbearance treatment, generally within the previous two years, and

have either now returned to early arrears or have received an additional forbearance measure, Customers who have cured

but who were 90 days past due, or considered unlikely to pay, in the previous six months are also considered to remain in

default and classified as credit impaired. The Bank policy is not to rebut the presumption in IFRS 9 that loans which are

more than 90 days past due are in default. Grouping of financial assets for credit impairment losses measured on a collective basis

Expected credit losses are assessed and measured on a collective basis for homogenous groups where the financial

assets within that group share similar credit risk characteristics. Given the predominant retail nature of TSB’s loans,

groupings are determined using product type, such as secured (retail), unsecured, and business banking exposures. The

appropriateness of the groupings is monitored and reviewed on a periodic basis. TSB does not currently assess any

material exposures on an individual basis. Significant increase in credit risk

Financial assets are considered to be in stage 2 when their credit risk has increased significantly since initial recognition.

The main factor that is considered by The Bank is an increase in the residual lifetime Probability of Default (PD) since initial

recognition. A loan will be considered to have experienced a significant increase in credit risk, and be transferred from

stage 1 to stage 2 if the residual lifetime PD has increased by a factor of 2 times the origination PD and the increase is

between 10bps and 410bps (for different cohorts of secured retail), between 250bps and 770bps for unsecured products,

and more than 50bps for business banking assets. As a secondary qualitative assessment criterion, financial assets that

are in forbearance but not credit impaired are considered to have experienced significant increase in credit risk and will be

in stage 2. As a backstop, The Bank does not rebut the presumption in IFRS 9 that all financial assets that are more than

30 days past due have experienced a significant increase in credit risk. Consequently, in respect of loans and advances to customers, The Bank does not use the practical expedient in IFRS 9

which permits low credit risk loans (i.e. those considered investment grade) to remain in stage 1 without an assessment of

significant increase (‘low credit risk exemption’). However, in respect of all other categories of financial assets at amortised

cost and financial assets to fair value through other comprehensive income, the Bank uses the low credit risk exemption

and categorises these financial assets as stage 1. Credit Impaired (stage 3)

Financial assets are considered to be credit impaired and included in stage 3 when there is objective evidence of credit

impairment which is consistent with the definition of default for IFRS 9 as described above.



Accounting policies effective for the year ended December 2020 (continued)

(c) Impairment of financial assets (continued)

Purchased or originated credit impaired (POCI)

Financial assets that are credit impaired at the date of their purchase or origination will be reported in a separate POCI

category. For such assets, lifetime ECL are incorporated into the calculation of the effective interest rate on initial

recognition. Consequently, POCI assets do not carry an impairment allowance on initial recognition. The amount

recognised as a loss subsequent to initial recognition is equal to the change in lifetime ECL since initial recognition of the

asset. Subsequent to origination, POCI financial assets that no longer meet the stage 3 criteria will no longer be considered

to be credit impaired but will continue to be reported as POCI.

Write offs

A loan or advance is normally written off, either partially or in full, against the related allowance when the proceeds from

realising any available security have been received or there is no realistic prospect of recovery (as a result of the customer's

insolvency, ceasing to trade or other reason) and the amount of the loss has been determined. Subsequent recoveries of

amounts previously written off decrease the amount of impairment losses recorded in the statement of comprehensive

income. Financial assets that are written off could still be subject to enforcement activities in order to comply with TSB’s

procedures for recovery of amounts due. In the event of significant improvements in expected recoveries on stage 3 assets,

impairment reversals are recognised as a credit to impairment losses in the income statement.

Modified financial assets and derecognition

A financial asset that is renegotiated is derecognised if the existing agreement is cancelled and a new agreement made

on substantially different terms. Where the contractual cash flows of a financial asset have been modified and the financial

asset was not derecognised, its gross carrying amount is recalculated as the present value of the modified contractual

cash flows, discounted at the original effective interest rate with a gain or loss recognised in the income statement. The

contractual terms of a loan may be modified for a number of reasons, primarily due to customers being granted a

concession due to their financial difficulty and the loan being considered in forbearance.

Methodology for measuring expected credit losses

The allowance for ECLs is calculated using three main components: a probability of default (PD), a loss given default

(LGD); and the exposure at default (EAD).For accounting purposes, the 12 month and lifetime PDs represent the probability

of a default occurring over the next 12 months or the lifetime of the financial instruments, respectively, based on conditions

existing at the balance sheet date and expected future economic conditions that affect credit risk.

The LGD represents losses expected on default, taking into account the mitigating effect of collateral, its expected value

when realised and the time value of money and is discounted using the effective interest rate. The EAD represents the

expected balance at default, taking into account the repayment of principal and interest from the balance sheet date to the

default event together with any expected drawdown of a committed facility.

ECL is calculated by multiplying the PD (12 month or lifetime depending on the staging of the loan), LGD and EAD. In

respect of TSB’s mortgages and unsecured personal loans, ECL is calculated from the initial recognition of the loan for the

maximum period that TSB is exposed to credit risk, which takes into account expected customer repayment behaviour. In

respect of revolving loans, such as overdrafts and credit cards, TSB’s exposure to credit risk is not limited to the contractual

period and the expected life is calculated based on the estimated behavioural life of the loan and associated undrawn

facility which is currently ten years. The measurement of ECL also takes into account all reasonable and supportable

information, including forward looking economic scenarios to calculate a probability weighted forward looking estimate.

(d) Derecognition of financial assets

Financial assets are derecognised when the contractual right to receive cash flows from those assets has expired or when

the Bank has transferred its contractual right to receive the cash flows from the assets and either (i) substantially all of the

risks and rewards of ownership have been transferred; or (ii) The Bank has neither retained nor transferred substantially

all of the risks and rewards, but has transferred control.

Where the Bank enters into securitisation transactions to finance certain loans and advances to customers using a

structured entity funded by the issue of debt, these loans and advances continue to be recognised, as TSB has not

transferred substantially all the risks and rewards. A corresponding liability for the funding is also recognised.

Financial instruments sold under a repurchase agreement, under which substantially all the risks and rewards of ownership

are retained by the Bank, continue to be recognised on the balance sheet and the sale proceeds are recognised as a

financial liability. The difference between the sale and repurchase price is recognised over the life of the agreement as

interest expense using the effective interest method.



5. Debt securities

Bank and Company

Fair value through other comprehensive income (FVOCI)

2020

£ million

2019

£ million

UK Gilts 1,405.4 1,171.4

Supranational and development bank bonds 91.5 416.0

Total debt securities at FVOCI 1,496.9 1,587.4

Amortised cost

2020

£ million

2019

£ million

UK Gilts 555.3 102.9

Supranational and development bank bonds 356.9 279.4

Covered bonds 211.5 166.3

Total debt securities at amortised cost 1,123.7 548.6

Debt securities of £1,496.9 million (2019: £1,587.4 million) are held as part of the liquid asset portfolio, where the business

model is to hold the assets to collect the contractual cash flows and to generate cash flows from selling the assets. These

assets are carried at FVOCI.

Debt securities of £1,123.7 million (2019: £548.6 million) are held as part of a second, separate liquid asset portfolio, where

the business model is solely to hold the assets to collect the contractual cash flows. These assets are carried at amortised

cost.

At 31 December 2020 UK gilts at FVOCI with a carrying value of £225.8 million (2019: £nil) were subject to repurchase

agreements. A further £190.1 million had been pledged as collateral (2019: £131.7 million).

6. Loans to credit institutions


2020

£ million

2019

£ million

2020

£ million

2019

£ million

Cash deposits held 43.3 373.2 – –

Total loans to credit institutions 43.3 373.2 – –

At 31 December 2020, restricted cash deposits were held in respect of the Bank’s covered bond programme. At 31

December 2019, cash deposits were held for both TSB securitisation programmes (£342.5 million) and covered bond

programmes (£30.7 million). As described in note 2, during 2020, TSB’s securitisation programmes matured and the

associated deposit balances were no longer required.



7. Loans and advances to customers


2020

£ million

2019

£ million

2020

£ million

2019

£ million

Secured (retail) 30,790.4 29,189.2 30,790.4 29,189.2

Unsecured portfolios 1,992.7 1,855.1 1,992.7 1,855.1

Business banking 715.3 131.1 715.3 131.1

33,498.4 31,175.4 33,498.4 31,175.4

Valuation adjustments (1) 58.5 63.4 58.5 63.4

Gross loans and advances to customers 33,556.9 31,238.8 33,556.9 31,238.8

Allowance for credit impairment losses (2) (note 9) (239.0) (163.0) (239.0) (163.0)

Loans and advances to customers 33,317.9 31,075.8 33,317.9 31,075.8 (1) Comprises accrued interest of £19.1 million (2019: £14.2 million) and effective interest rate adjustments of £39.4 million (2019: £49.2 million). (2) Comprises allowance for credit impairment losses on secured lending of £43.4 million (2019: £34.7 million), unsecured lending of £187.6 million (2019:

£125.1 million) and business banking lending of £8.0million (2019: £3.2 million).

In the normal course of business, the Bank provides commitments to lend to its customers as presented below.


2020

£ million

2019

£ million

2020

£ million

2019

£ million

Credit cards 2,956.9 2,697.5 2,956.9 2,697.5

Mortgage offers made 2,164.1 1,164.5 2,164.1 1,164.5

Current accounts and other lending 1,130.5 1,091.6 1,130.5 1,091.6

Total commitments 6,251.5 4,953.6 6,251.5 4,953.6

The credit impairment provision in respect of total loan commitments is shown in note 30.

8. Other advances


2020

£ million

2019

£ million

2020

£ million

2019

£ million

Items in the course of collection from credit institutions 21.7 16.6 21.7 16.6

Items in the course of collection from non-credit institutions 2.8 0.4 2.8 0.4

Collateral placed at central clearing houses 190.8 257.3 190.8 257.3

Collateral placed with credit institutions 2.2 5.3 2.2 5.3

Total other advances 217.5 279.6 217.5 279.6



9. Allowance for credit impairment losses on financial assets at amortised cost

The following tables detail changes in the gross carrying value of loans and advances to customers and the allowance for

credit impairment losses. In addition, the movement in expected credit loss provisions in respect of off balance sheet

exposures is shown in note 30. For all other classes of financial assets to which TSB is exposed to credit risk (as listed in

note 19(i) on page 55), expected credit losses have been assessed as immaterial.

Stage 1 Stage 2 Stage 3 POCI (1) Total

TSB

Gross

Loans

£ million

Allow.

for credit

impair-

ment

losses

£ million

Gross

Loans

£ million

Allow.

for credit

impair-

ment

losses

£ million

Gross

Loans

£ million

Allow.

for credit

impair-

ment

losses

£ million

Gross

Loans

£ million

Allow.

for credit

impair-

ment

losses

£ million

Gross

Loans

£ million

Allow.

for credit

impair-

ment

losses

£ million

At 1 January 2019 26,678.8 (50.8) 2,877.9 (69.7) 398.3 (71.0) 190.0 (7.2) 30,145.0 (198.7)

Changes reflected in impairment losses:

Increases due to originations 6,206.7 (23.3) 34.8 – 11.2 – 5.7 – 6,258.4 (23.3)

Decreases due to repayments (4,400.8) 10.5 (612.7) 3.4 (72.4) 2.2 (34.4) 0.1 (5,120.3) 16.2

Changes in credit risk (2) – 75.1 – (82.5) – (23.7) – 4.9 – (26.2)

Amounts written off (0.1) – (0.8) 0.7 (106.8) 68.3 – – (107.7) 69.0

Transfers between stages: (302.9) (63.8) 150.7 87.3 152.2 (23.5) – – – –

To stage 1 3,433.0 (80.6) (3,413.5) 77.4 (19.5) 3.2 – – – –

To stage 2 (3,710.8) 16.2 3,784.3 (22.2) (73.5) 6.0 – – – –

To stage 3 (25.1) 0.6 (220.1) 32.1 245.2 (32.7) – – – –

At 31 December 2019 28,181.7 (52.3) 2,449.9 (60.8) 382.5 (47.7) 161.3 (2.2) 31,175.4 (163.0)

Transfers to credit impairment provisions (note 30) – 8.6 – 6.5 – 0.2 – – – 15.3


Increases due to originations 7,594.3 (48.1) 80.0 (0.3) 15.5 – 6.3 – 7,696.1 (48.4)

Decreases due to repayments (4,725.5) 16.9 (480.2) 4.0 (76.8) 2.5 (23.6) – (5,306.1) 23.4

Changes in credit risk (2) – 30.1 – (116.6) – (22.6) – (0.6) - (109.7)

Amounts written off – – – - (67.0) 43.4 – – (67.0) 43.4

Transfers between stages: (1,297.0) (22.1) 1,151.7 48.0 145.3 (25.9) – – – –

To stage 1 3,469.8 (107.9) (3,454.0) 104.9 (15.8) 3.0 – – – –

To stage 2 (4,746.3) 85.2 4,824.3 (90.7) (78.0) 5.5 – – – –

To stage 3 (20.5) 0.6 (218.6) 33.8 239.1 (34.4) – – – –

At 31 December 2020 29,753.5 (66.9) 3,201.4 (119.2) 399.5 (50.1) 144.0 (2.8) 33,498.4 (239.0)

(1) Purchased or originated as credit impaired. (2) Includes changes to the allowance for credit impairment losses arising from stage transfers and other changes to risk parameters.

Impairment losses recognised in the income statement of £162.7 million comprise of changes in the impairment allowance

reflected in the lines under the heading ‘changes reflected in impairment losses’ together with the net amounts written off

as reflected in the table above. In addition, impairment losses includes the subsequent recovery of amounts previously

written off and other amounts charged directly to the income statement. Gross loans balances increased by £2,323.0 million to £33,498.4 million. This was driven by secured (retail) lending which

increased by £1,601.2 million reflecting strong trading performance, particularly in the second half of 2020 following lower

levels of activity in the first half due to the initial COVID-19 lockdown restrictions. In addition, business banking increased

by £584.1 million, primarily due to lending through the Bounce Back Loan Scheme. Growth in unsecured balances was

more muted, increasing £137.7 million, reflecting lower demand as consumers reduced spending during 2020. Stage 1 gross loans increased by £1,571.8 million reflecting the increase described above partially offset by a net transfer

of £1,297.0 million to stages 2 and 3. This reflected the deterioration in the economic outlook from COVID-19. Gross

transfers from stage 1 to stage 2 of £4,746.3 million reflect the initial impact of COVID-19. This was partially offset by

balances transferring back from stage 2 to stage 1 in the second half of the year as customer behaviour and economic

forecasts settled and the effect of the change to the thresholds for assessing significant increase in credit risk, as described

on page 44. Determining the threshold between stage 1 and 2 requires judgment in assessing significant increase in credit

risk as also described on page 44. Stage 2 balances increased by £751.5 million reflecting the net transfers in from stage 1, partially offset by ongoing

customer repayments of balances. Stage 3 balances increased by £17.0 million reflecting the deteriorating economic

environment in 2020 but this was largely offset by loan balances written off and customer repayments. Gross loans written off during 2020 of £67.0 million (2019: £107.7 million) continue to be subject to the right to undertake

enforcement activities, despite there being no realistic prospect of recovery.



9. Allowance for credit impairment losses on financial assets at amortised cost (continued)

The tables below set out movements analysed between TSB’s mortgage portfolios and other lending classes.

Stage 1 Stage 2 Stage 3 POCI Total

Secured (retail)

Gross

Loans

£ million

Allow.

for credit

impair-

ment

losses

£ million

Gross

Loans

£ million

Allow.

for credit

impair-

ment

losses

£ million

Gross

Loans

£ million

Allow.

for credit

impair-

ment

losses

£ million

Gross

Loans

£ million

Allow.

for credit

impair-

ment

losses

£ million

Gross

Loans

£ million

Allow.

for credit

impair-

ment

losses

£ million

At 1 January 2019 25,202.3 (17.6) 2,250.9 (4.4) 287.3 (7.5) 189.8 (7.0) 27,930.3 (36.5)


Increases due to originations 5,823.1 (18.3) 6.3 – 3.0 – 3.4 – 5,835.8 (18.3)

Decreases due to repayments (4,054.6) 9.7 (425.6) 0.8 (62.8) 1.0 (32.0) – (4,575.0) 11.5

Changes in credit risk – 12.8 – (7.7) – (1.4) – 4.9 – 8.6

Amounts written off – – – – (1.9) – – – (1.9) –

Transfers between stages (223.4) (2.9) 145.3 3.8 78.1 (0.9) – – – –

To stage 1 2,776.5 (5.6) (2,762.9) 5.5 (13.6) 0.1 – – – –

To stage 2 (2,990.1) 2.7 3,055.7 (3.9) (65.6) 1.2 – – – –

To stage 3 (9.8) (147.5) 2.2 157.3 (2.2) – – – –

At 31 December 2019 26,747.4 (16.3) 1,976.9 (7.5) 303.7 (8.8) 161.2 (2.1) 29,189.2 (34.7)

Transfers to credit impairment provisions (note 30) – – – – – 0.1 – – – 0.1


Increases due to originations 6,164.0 (32.4) 13.1 (0.3) 6.0 – 4.5 – 6,187.6 (32.7)

Decreases due to repayments (4,193.9) 15.9 (317.1) 1.3 (53.0) 2.3 (21.9) - (4,585.9) 19.5

Changes in credit risk – 10.3 – (5.3) – 0.1 – (0.7) – 4.4


Transfers between stages: (943.7) 11.9 867.3 (8.0) 76.4 (3.9) – – – –

To stage 1 2,667.8 (7.8) (2,656.9) 7.5 (10.9) 0.3 – – – –

To stage 2 (3,607.4) 19.6 3,679.7 (21.3) (72.3) 1.7 – – – –

To stage 3 (4.1) 0.1 (155.5) 5.8 159.6 (5.9) – – – –

At 31 December 2020 27,773.8 (10.6) 2,540.2 (19.8) 332.6 (10.2) 143.8 (2.8) 30,790.4 (43.4)

Unsecured and business banking £ million £ million £ million £ million £ million £ million £ million £ million £ million £ million

At 1 January 2019 1476.5 (33.2) 627.0 (65.3) 111.0 (63.5) 0.2 (0.2) 2,214.7 (162.2)


Increases due to originations 383.6 (5.0) 28.5 – 8.2 – 2.3 – 422.6 (5.0)

Decreases due to repayments (346.2) 0.8 (187.1) 2.6 (9.6) 1.2 (2.4) 0.1 (545.3) 4.7

Changes in credit risk – 62.3 – (74.8) – (22.3) – – – (34.8)

Amounts written off (0.1) – (0.8) 0.7 (104.9) 68.3 – – (105.8) 69.0


To stage 1 656.5 (75.0) (650.6) 71.9 (5.9) 3.1 – – – –

To stage 2 (720.7) 13.5 728.6 (18.3) (7.9) 4.8 – – – –

To stage 3 (15.3) 0.6 (72.6) 29.9 87.9 (30.5) – – – –

At 31 December 2019 1,434.3 (36.0) 473.0 (53.3) 78.8 (38.9) 0.1 (0.1) 1,986.2 (128.3)

Business banking portfolio(1) (118.1) 1.7 (9.6) 0.7 (3.5) 0.8 - - (131.2) 3.2

Unsecured - at 1 January 2020 1,316.2 (34.3) 463.4 (52.6) 75.3 (38.1) 0.1 (0.1) 1,855.0 (125.1)

Transfers to credit impairment provisions – 8.3 – 6.4 – 0.1 – – – 14.8


Increases due to originations 708.0 (13.1) 10.8 – 7.0 – 1.8 - 727.6 (13.1)

Decreases due to repayments (357.3) 1.0 (143.8) 2.6 (20.9) 0.1 (1.7) - (523.7) 3.7

Changes in credit risk – 8.2 – (96.9) – (22.7) – 0.1 - (111.3)

Amounts written off – – – – (66.2) 43.4 – – (66.2) 43.4


To stage 1 676.5 (81.8) (672.1) 79.5 (4.4) 2.3 – – – –

To stage 2 (931.5) 60.1 936.6 (63.7) (5.1) 3.6 – – – –

To stage 3 (16.2) 0.5 (60.1) 26.9 76.3 (27.4) – – – –

Unsecured - At 31 December 2020 1,395.7 (51.1) 534.8 (97.8) 62.0 (38.7) 0.2 – 1,992.7 (187.6) (1) Business banking is presented as a separate class of financial instrument in 2020 .




During 2020, the business banking portfolio increased significantly as a result of lending under the Bounce Back Loan

Scheme. Given the different risk characteristics in this portfolio relative to the unsecured portfolios, business banking is

considered to be a separate asset class of financial instrument and movements during 2020 in gross loans and allowances

have been presented separately.

Stage 1 Stage 2 Stage 3 POCI Total

Business banking

Gross

Loans

£ million

Allow.

for credit

impair-

ment

losses

£ million

Gross

Loans

£ million

Allow.

for credit

impair-

ment

losses

£ million

Gross

Loans

£ million

Allow.

for credit

impair-

ment

losses

£ million

Gross

Loans

£ million

Allow.

for credit

impair-

ment

losses

£ million

Gross

Loans

£ million

Allow.

for credit

impair-

ment

losses

£ million

At 31 December 2019 118.1 (1.7) 9.6 (0.7) 3.5 (0.8) – – 131.2 (3.2)

Transfers to credit impairment provisions – 0.3 – 0.1 – – – – 0.4


Increases due to originations 722.3 (2.6) 56.1 – 2.5 – - – 780.9 (2.6)

Decreases due to repayments (174.3) – (19.3) 0.1 (2.9) 0.1 – – (196.5) 0.2

Changes in credit risk – 11.6 – (14.4) – – – – – (2.8)



To stage 1 125.5 (18.3) (125.0) 17.9 (0.5) 0.4 – – – –

To stage 2 (207.4) 5.5 208.0 (5.7) (0.6) 0.2 – – – –

To stage 3 (0.2) – (3.0) 1.1 3.2 (1.1) – – – –

At 31 December 2020 584.0 (5.2) 126.4 (1.6) 4.9 (1.2) – – 715.3 (8.0)

As described on page 44, a post model adjustment (PMA) of £2.3 million was recognised in the impairment allowance in

relation to Bounce Back Loan Scheme loans underwritten in the year where it has been assessed that there is a possibility

TSB will not be able to call on the government guarantee. This reflects a risk that there may be additional Bounce Back

Loan exposures where TSB might not be able to call on the government guarantee. TSB has sought to mitigate this risk

through a number of internal actions which include scheme eligibility assessments for individual loans and proactive

discussions with the British Business Bank.

Significant estimates - measurement uncertainty and sensitivity analysis of expected credit losses

The measurement of the allowance for credit impairment losses is complex and involves the use of significant judgement

and estimation uncertainty as follows:

• Estimation uncertainty from the use of multiple forward-looking economic scenarios and associated weightings;

• Judgements required to adjust modelled outcomes to reflect where they are not considered to fully capture expected

credit losses (referred to as PMAs); and

• Judgements required to assess when a financial asset has experienced a significant increase in credit risk.

Forecast economic scenarios

TSB currently uses four economic scenarios, representative of management’s view of forecast economic conditions. Key

scenario assumptions are set internally for GDP, house prices, unemployment, and interest rates. The forecast for GDP

is compared with data published by the Bank of England and other external sources to ensure the scenarios are free from

bias and reflect independent external information.

Severe downside scenarios, when considered appropriate, are typically aligned with those used for ICAAP purposes and

are considered to be tail risk scenarios, used to capture non-linearity in expected credit losses. This is where the

relationship of credit losses to the relevant economic variables which influence credit losses (e.g. house prices or

unemployment) is such that each unit of change in an economic variable does not lead to a uniform change in expected

credit losses. For example, credit losses in secured portfolios may remain subdued in an environment where house prices

exhibit only a small decrease. However, after a certain level of house price fall credit losses would be forecast to increase

more meaningfully where collateral values fall below the level of the customer loan.

Scenarios and associated weightings are reviewed monthly by an internal forum and updated, as necessary, to enable

significant developments to be taken into account in measuring credit impairment provisions. The scenarios and weightings

are presented quarterly for review and approval for use by the Audit Committee.




The four scenarios, together with the weightings applied at December 2020, are described below. By necessity, these

scenarios have been updated significantly from the scenarios used in 2019 to reflect the impact in 2020 of COVID-19. At

the date of this report, GDP was expected to have decreased by 11.5% in 2020 while house prices remained buoyant and

unemployment stable, reflecting support from the government through measures such as the various job protection

schemes and relaxations to stamp duty on house purchases. Throughout 2020, the potential outcomes from the UK:EU

trade agreement negotiations were monitored and reflected in the suite of economic scenarios used throughout the year.

Subsequent to the agreement reached in December, scenarios that considered the specific risks of ‘no deal’ Brexit were

removed.

Base case scenario: Cautious recovery following the COVID-19 economic ‘shock’ in 2020

• Following a significant fall in 2020, a recovery in GDP commences from early 2021 with a return to pre-pandemic

levels in the first half of 2022. Employment levels continue to be maintained by government support schemes, with

unemployment forecast to peak in the second quarter of 2021 at 7.3%. Forecast house prices are expected to suffer

a peak to trough fall of 12% by the second half of 2021, reflecting the anticipated increase in unemployment and the

end of the current temporary concession in stamp duty.

Downside scenario: Recovery stalls in the first half of 2021

• GDP begins to recover in H1 2021, but at a slower rate than the base case scenario, as restrictions remain in place.

Certain sectors, such as hospitality and leisure, are particularly damaged. Unemployment rises sharply, peaking at

8.7% in the second quarter of 2021 due to weak recovery and the ending of the Government’s support schemes.

Unemployment eventually begins to fall but remains higher than the base case due to long-term scarring effects. In

response, the BoE cuts Bank Rate to zero. House prices suffer a peak to trough fall of 15% in this scenario.

Severe downside (low interest rate) scenario: Uncontrolled pandemic

• Designed to capture the risks of a high impact, low probability scenario where the COVID-19 pandemic cannot be

controlled. Confidence collapses and there is a significant flight from higher risk assets. GDP stagnates in 2021 after

another decrease in Q1 2021. Unemployment rises to a peak of 10.8% in Q2 2021 and drives a house price fall of

23%, despite Bank Rate being cut to zero.

Upside: Rapid Recovery

• Developments in health/technology eradicate the COVID-19 virus more quickly than in the base case scenario and

the economy is boosted by supportive fiscal and monetary policies. Unemployment rises less sharply in H1 2021 than

in the base case and reverses more quickly due to the stronger recovery. The BoE leaves Bank Rate on hold until Q4

2022. By this time, GDP has comfortably surpassed its Q4 2019 level, and unemployment is below 4%. House prices

fall in 2021 but recover more rapidly than the base case in 2022 and beyond.

The table below shows the weightings applied to each of the economic scenarios applied in measuring the allowance for

credit impairment losses, together with ranges of the most sensitive inputs of unemployment, house prices, and interest

rates:

At 31 December 2020

Base case Upside

Downside

Severe

Downside

Scenario weighting 50 % 10 % 35 % 5 %

Unemployment Peak rate 7.3 % 6.1 % 8.7 % 10.8 %

House prices Peak-to-trough fall (11.8)% (6.9)% (15.2)% (22.5)%

Interest rates Most extreme rate(1) 0.25 % 1.25 % 0.0 % 0.0 %

At 31 December 2019

Base case Upside Mild Down Downside

Severe

Down %

Scenario weighting 40% 10% 20% 25% 5%

Unemployment Peak rate 3.8% 3.8% 5.1% 6.3% 9.2%

House prices Peak-to-trough fall +ve +ve (14.0)% (20.5)% (34.5)%

Interest rates Most extreme rate(1) 0.75% 2.0% 0.25% 0.0% 4.0%

(1) The most extreme rate is the interest rate furthest from the current rate, either positive or negative.




The table below sets out the key economic variables used in the scenarios, together with their weighted averages.

Scenario Weighting

Economic

measure(1) 2021 2022 2023 2024 2025

Upside 10%

GDP 9.3% 6.7% 1.7% 1.6% 1.6%

Unemployment 4.3% 3.4% 3.3% 3.3% 3.3%

House prices (5.8)% 4.4% 4.8% 5.0% 3.6%

Interest rates 0.1% 0.25% 0.75% 1.25% 1.25%

Base 50%

GDP 6.1% 5.8% 1.5% 1.4% 1.4%

Unemployment 6.8% 5.0% 4.5% 4.2% 4.0%

House prices (11.8)% 7.3% 5.6% 5.0% 3.6%

Interest rates 0.1% 0.1% 0.1% 0.1% 0.25%

Downside 35%

GDP 3.5% 4.9% 1.3% 1.4% 1.4%

Unemployment 8.0% 6.4% 5.6% 5.0% 5.0%

House prices (13.5)% 3.1% 5.6% 5.0% 3.6%

Interest rates 0% 0% 0% 0% 0%

Severe Down 5%

GDP 0.8% 3.6% 1.2% 1.4% 1.4%

Unemployment 9.3% 7.1% 6.5% 6.1% 5.6%

House prices (13.5)% (10.3)% 0% 0% 3.4%

Interest rates 0% 0% 0% 0% 0%

Weighted

average n/a

GDP 5.2% 5.5% 1.4% 1.4% 1.4%

Unemployment 7.0% 5.4% 4.9% 4.5% 4.4%

House prices (11.9)% 4.7% 5.2% 4.8% 3.6%

Interest rates 0.1% 0.1% 0.1% 0.2% 0.25% (1) GDP is presented as the annual change in forecast quarterly average GDP for each year. Unemployment and interest rates are presented as the Q4

forecast for each year. House price changes are presented as the year-on-year change in Q4 forecast house prices in each year.

Key variables in each of the scenarios, as set out above, are assumed to revert to a long term constant rate over a period

of up to two years after the end of the initial forecast period. The long term reversionary rates used are forecast as follows:

GDP 1.5% (2019: 1.5%), unemployment 4.0% (2019: 3.6%); interest rates 1.0% (2019: 1.25%); and house price growth of

3.75% (2019: 3.75%) per annum.

Sensitivity to alternative weightings

The calculation of the allowance for credit impairment losses is sensitive to changes in the chosen weightings. The table

below summarises the impact on the allowance for credit impairment losses from the use of alternative scenario weightings.

The probability-weighted allowance for credit impairment losses was 10% higher (2019: 21% higher) than if it had been

measured using only the base case scenario assumptions.

2020

£ million

2019

£ million

Allowance for credit losses 239.0 163.0

Provision for off balance sheet exposures (note 30) 19.2 2.6

Combined on and off balance sheet - using weighted forecast 258.2 165.6

Increase/(decrease) if a 100% weighting was applied to each scenario:

Upside (50.0) (34.0)

Base case (23.0) (29.0)

Downside 33.0 20.0

Severe down – low rate 177.0 208.0




Judgements required in assessing post model adjustments

At 31 December 2020, the allowance of £239.0 million (2019: £163.0 million) included PMAs of £41.2 million (2019: £57.6

million) as shown in the table below:

2020

£ million

2019

£ million

COVID-19 related (consumer behaviour) 38.0 –

Impairment default triggers 14.7 17.4

Model performance 19.9 16.8

Operational matters 13.0 23.4

Economic scenarios (11.2) –

Bounce Back Loan Scheme (33.2) –

Total 41.2 57.6

The suite of methodologies used to calculate PMAs are grounded in similar principles to those adopted for the core

impairment models, with the inputs and PMA methodologies subject to regular oversight and PMA outputs reviewed in a

consistent manner to the output from the core impairment models. The key categories of PMAs are as follows:

• COVID-19 related PMAs capture the increased risk of credit losses in all portfolios arising from changes in consumer

behaviour which have not been considered in conditioning the impairment models. For example, circumstances, such

as customer repayment holidays, static bureau data reporting, and associated exclusion from forbearance

classifications, together with changes in customer spending patterns are changing the indicators of underlying credit

risk but are not being captured by the impairment models.

• Impairment default trigger PMAs primarily reflect management’s judgement that impairment models do not fully

capture the risks of credit losses arising from interest only mortgage redemptions and certain mortgage customer’s

current affordability benefitting from low interest rates.

• Model performance PMAs capture adjustments for known weaknesses in the impairment models for secured (retail)

and unsecured portfolios. These have been temporarily remediated through PMAs until a rebuild of the model or

model component can be completed and implemented within the core ECL model framework.

• PMAs to address operational matters have reduced significantly in 2020 reflecting the clearance of historical, migration

related delays to unsecured loan charge offs and the adoption during 2020 of updated house price indexation data.

• The economic scenarios PMA was required to reflect late changes in economic scenarios that took account of Brexit

negotiations and COVID-19 developments in the finalisation of the approved economic scenarios and associated

weightings, as described starting on page 41.

• A PMA to reduce the modelled allowance for credit impairment losses by £35.5 million in respect of Bounce Back

loans was required as the government guarantee is not a feature of the associated business banking loss given default

model. This was partially offset by a £2.3 million PMA that increased the impairment allowance to reflect the risk of

reduced recovery under the government guarantee arising from potential deficiencies in operational processes.

Judgements required in assessing significant increase in credit risk

TSB’s policy for determining when a financial asset has experienced a significant increase in credit risk is explained on

page 35. In applying this policy, the key judgement is the level of increase in the residual lifetime probability of default (PD)

as compared to the equivalent position at the origination of the financial asset. At 31 December 2020, secured (retail) loans

were considered to have experienced a significant increase in credit risk (and be in stage 2) when the residual lifetime PD

had increased by a factor of 2 times the origination PD and the increase was between 10bps and 410bps (2019: 10bps).

In addition , the threshold was 2 times the origination PD and the increase was between 250bps and 770bps (2019: 30bps-

100bps) for unsecured and more than 50bps for business banking. In assessing the appropriateness of this judgement,

management applied a framework that considers a number of quantitative factors, including the accuracy of the thresholds

and their predictive ability. In the light of analysis undertaken during 2020, changes in thresholds resulted in £578.6 million

of gross loans being transferred from stage 2 to stage 1, together with the associated impairment allowance of £0.1 million.

Consistent with the COVID-19 related PMA described above, a PMA was applied to the modelled stage allocation of gross

loans to capture the increased risk of credit losses arising from changes in consumer behaviour which have not been

considered in conditioning the impairment models. This resulted in the transfer of £1,193.1 million of gross balances from

stage 1 to stage 2 and £24.3 million from stage 2 to stage 3.



10. Fair value of financial assets

The following table summarises the carrying values of financial assets presented on the balance sheet and the fair value

of these financial instruments. The fair values presented are at a specific date and may be significantly different from the

amount which will actually be received on the maturity or settlement date.

2020 2019

Bank

Note

Carrying

value

£ million

Fair

value

£ million

Carrying

value

£ million

Fair

value

£ million

Financial assets

Debt securities at amortised cost 1,123.7 1,127.9 548.6 549.9

Loans and advances to customers 33,317.9 33,315.0 31,075.8 31,040.7

Financial assets at fair value through other comprehensive income 1,496.9 1,496.9 1,587.4 1,587.4

Derivative financial assets at fair value through profit or loss 198.3 198.3 111.5 111.5

Hedging derivative financial assets 139.9 139.9 93.4 93.4

2020 2019

Company

Note

Carrying

value

£ million

Fair

value

£ million

Carrying

value

Restated(1)

£ million

Fair

value

Restated(1)

£ million

Financial assets

Debt securities at amortised cost 1,123.7 1,127.9 548.6 549.9

Loans and advances to customers 33,317.9 33,315.0 31,075.8 31,040.7

Financial assets at fair value through other comprehensive income 1,496.9 1,496.9 1,587.4 1,587.4

Derivative financial assets at fair value through profit or loss 198.3 198.3 126.2 126.2

Hedging derivative financial assets 139.9 139.9 49.8 49.8

(1) Restated as described in note 33.

Cash, cash balances at central banks and other demand deposits; loans and advances to central banks; loans and

advances to credit institutions and other advances are generally short term in nature and to counterparties with a high

credit quality and the carrying amount is a reasonable approximation of fair value.

The Bank provides loans at both fixed and variable rates. Fair value is principally estimated by discounting anticipated

cash flows (including interest at contractual rates) at market rates for similar loans offered by the Bank and other financial

institutions. Certain loans secured on residential properties are made at a fixed rate for a limited period, typically two to

five years, after which the loans revert to the relevant variable rate. The fair value of such loans is estimated by reference

to the market rates for similar loans of maturity equal to the remaining fixed interest rate period.



10. Fair value of financial assets (continued)

Valuation hierarchy of financial assets carried at amortised cost

The table below analyses the fair values of financial assets carried at amortised cost and for which fair value is disclosed.

Bank and Company

Level 1

£ million

Level 2

£ million

Level 3

£ million

Total fair

value

£ million

Total

carrying

value

£ million

Debt securities at amortised cost 1,127.9 – – 1,127.9 1,123.7

Loans and advances to customers – – 33,315.0 33,315.0 33,317.9

At 31 December 2020 1,127.9 – 33,315.0 34,442.9 34,441.6

At 31 December 2019 549.9 – 31,040.7 31,590.6 31,624.4

Valuation hierarchy of financial assets carried at fair value

The table below analyses the fair values of the financial assets of the Bank which are carried at fair value.

Bank

Level 1

£ million

Level 2

£ million

Level 3

£ million

Total fair

value

£ million

Total

carrying

value

£ million

At 31 December 2020

Financial assets at fair value through other comprehensive income 1,496.9 – – 1,496.9 1,496.9

Derivative assets at fair value through profit or loss – 198.3 – 198.3 198.3

Hedging derivative assets – 139.9 – 139.9 139.9

Total 1,496.9 338.2 – 1,835.1 1,835.1

At 31 December 2019




Total 1,587.4 204.9 – 1,792.3 1,792.3

Company

Level 1

£ million

Level 2

£ million

Level 3

£ million

Total fair

value

£ million

Total

carrying

value

£ million

At 31 December 2020




Total 1,496.9 338.2 – 1,835.1 1,835.1

At 31 December 2019


Derivative assets at fair value through profit or loss(1) – 126.2 – 126.2 126.2


Total 1,587.4 161.3 – 1,763.4 1,763.4


A description of the fair value levels is included in note 4.

Financial assets at fair value through other comprehensive income are valued using quoted market prices and are therefore

classified as Level 1 assets. Derivative financial assets are primarily collateralised interest rate swaps and are valued using

a discounted cash flow model where the most significant input is interest yield curves which are developed from publicly

quoted LIBOR and SONIA rates. As such derivative financial instruments are classified as Level 2 assets.


Notes to the financial statements Income

We earn income in the form of interest that we receive on the loans we make to customers and from our liquidity portfolio

and we pay interest to savings and bank account customers on the money they deposit with us and to providers of other

forms of funding. We also earn other income in the form of fees and charges from the provision of banking services and

commissions from the sale of certain third party products such as general insurance.

Accounting policies relevant to recognising income

(e) Interest income and expense

Financial instruments classified as amortised cost and fair value through other comprehensive income

Interest income and expense are recognised in the income statement for all interest-bearing financial instruments using

the EIR method. The EIR method is a method of calculating the amortised cost of a financial asset or liability and of

allocating the interest income or interest expense. The EIR is the rate that exactly discounts the estimated future cash

payments or receipts over the expected life of the instrument or, when appropriate, a shorter period, to the net carrying

amount of the financial asset or financial liability.

The effective interest rate is calculated on initial recognition of the financial asset or liability, estimating the future cash

flows after considering all the contractual terms of the instrument but not future credit losses. The calculation includes all

amounts paid or received by the bank that are an integral part of the overall return, direct incremental transaction costs

related to the acquisition, issue or disposal of a financial instrument and all other premiums or discounts. Reversionary

interest is not included in the assessment of the effective interest rate on secured products. Once a financial asset or a

group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised

using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss (see

accounting policy (c) on impairment of financial assets).

For financial assets, interest income is calculated by applying the effective interest rate to the gross carrying amount of the

financial asset. There are two exceptions to this as follows:

(i) Interest income in respect of financial assets that have become credit impaired (stage 3) subsequent to their initial

recognition is calculated by applying the effective interest rate to their amortised cost, net of expected loss provision; and

(ii) Interest income in respect of financial assets classified as purchased or originated credit impaired (POCI) is calculated

by applying the original credit adjusted effective interest rate to the amortised cost of the financial asset.

Derivative financial instruments

Interest income and expense on derivative financial instruments in qualifying hedge accounting relationships, where the

hedged item is a financial asset, is recognised in interest income. Where the hedged item is a financial liability, the

derivative interest income or expense is recognised in interest expense. Interest income and expense on derivatives

classified as held for trading is recognised in interest income.

(f) Other operating income

Other operating income, including fees and commissions, which are not an integral part of the EIR are generally recognised

over time as the service is provided and TSB satisfies its performance obligations.

Renewal commission income is recognised when TSB satisfies its performance obligations under the relevant contract

and management concludes that there is a high probability that there will be no significant reversal of the estimated income.


Notes to the financial statements Income (continued)

11. Net interest income

Bank

2020 £ million

2019 £ million

Interest and similar income

Interest income calculated using the effective interest method:

Cash, cash balances at central banks and other demand deposits 9.8 47.0

Financial assets at fair value through other comprehensive income 15.1 24.5

Debt securities at amortised cost 7.6 4.3

Loans to credit institutions 0.5 2.1

Loans and advances to customers 889.0 972.7

922.0 1,050.6

Derivative financial instruments (41.0) (5.8)

Total interest and similar income 881.0 1,044.8

Interest and similar expense

Interest expense calculated using the effective interest method:

Borrowings from central banks (9.5) (46.0)

Deposits from credit institutions (0.1) (0.2)

Customer deposits (74.7) (116.4)

Repurchase agreements – (1.8)

Debt securities in issue (13.8) (21.8)

Subordinated liabilities (22.4) (22.4)

Lease liabilities (1.3) (1.6)

(121.8) (210.2)

Derivative financial instruments 27.2 6.5

Total interest and similar expense (94.6) (203.7)

Net interest income 786.4 841.1

Included within interest and similar income is £15.9 million (2019: £18.7 million) in respect of impaired financial assets. 12. Net fee and commission income

Bank

2020 £ million

2019 £ million

Fee and commission income

Bank accounts 43.8 47.8

Credit and debit card fee income 55.4 85.7

Insurance commission income 9.2 11.0

Other 14.0 15.3

122.4 159.8

Fee and commission expense

Bank accounts (19.5) (28.2)

Credit and debit card fee expense (1.4) (0.2)

Other (15.6) (13.1)

(36.5) (41.5)

Net fee and commission income 85.9 118.3 The decrease in fee and commission income in 2020 was primarily driven by lower levels of consumer spending resulting from

COVID-19, which crystallised in the form of lower interchange income, international payments, foreign exchange and ATM

reciprocity. The prior year also benefitted from a non recurring £22.0 million in respect of changes made to card servicing

arrangements. Fees and commissions which are an integral part of the EIR are recognised in net interest income.

13. Other operating income

Bank

2020 £ million

2019 £ million

Migration related income (1) 35.1 –

Rental income 0.6 0.8


Total other operating income 37.8 1.2

(1) Migration related income from Lloyds Banking Group of £17.6 million and insurance recoveries of post migration losses of £17.5 million.

http://assets.net/


Notes to the financial statements Charges

Running a bank with 5 million customers comes with overheads. Charges we incur include the costs of paying

our employees, running our branches, investing in our business, paying for advertising and marketing.

Occasionally, our customers’ circumstances change and they are expected to be unable to repay the money they

borrow from us causing us to incur impairment losses. Finally, the Bank complies with its tax obligations to

HMRC.

Accounting policies relevant to recognising charges

(g) Pensions and other post-retirement benefits

The Bank operates defined contribution pension plans under which fixed contributions are paid. The costs of the Bank’s

defined contribution plans are charged to the income statement, as an operating expense, in the period in which they fall

due.

(h) Share-based compensation

The Bank operates a number of cash settled share-based compensation plans, in respect of services received from certain

of its employees. The total expense is recognised over the vesting period, which is the period over which all of the specified

vesting conditions are to be satisfied. A corresponding credit is recognised as a liability. In addition, in some circumstances

employees may provide services in advance of the grant date and therefore the liability is estimated for the purposes of

recognising the expense during the period between service commencement period and grant date.

At the end of each reporting period, the fair value of the liability is measured with any changes in fair value recognised in

operating expenses.

(i) Taxation

Current corporation tax which is payable or receivable on taxable profits or losses is recognised as a tax expense or credit

in the period in which the profits or losses arise.

Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets

and liabilities and their carrying amounts in the financial statements.

Deferred tax is determined using tax rates that have been enacted or substantively enacted by the balance sheet date that

are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred tax assets are recognised where it is probable that future taxable profits will be available against which the

temporary differences can be utilised.

Deferred and current tax assets and liabilities are offset when they arise in the same tax reporting group and where there

is both a legal right of offset and the intention to settle on a net basis or to realise the asset and settle the liability

simultaneously.


Notes to the financial statements Charges (continued)

14. Operating expenses

Bank

2020

£ million

2019

£ million

Staff costs

Wages and salaries 239.8 260.0

Social security costs 25.7 26.6

Other pension costs 32.1 34.4

Severance costs 45.1 34.3

Other staff costs 6.3 13.0

Total staff costs 349.0 368.3

Premises expenses

Rent 7.3 5.4

Rates, maintenance and other premises expenses 63.4 48.3

Total premises expenses 70.7 53.7

Other expenses

IT servicing and license costs 231.7 194.1

Regulatory, legal and consultancy costs 58.9 72.7

Collection and recovery conduct charges (note 30) 55.0 –

Marketing 42.3 40.3

Other expenses(1) 87.5 131.6

Recovery of additional post migration charges – (39.6)

Total other expenses 475.4 399.1

Depreciation of property and equipment 41.8 26.3

Depreciation of right of use asset 25.8 28.2

Amortisation of intangible assets 6.7 5.7

Total operating expenses 969.4 881.3

(1) Other expenses primarily comprise of the costs of various operational contracts, costs of non-staff contractors, fraud and operational losses.

The monthly average number of employees on a headcount basis during the year was 7,068 (2019: 8,198), all of whom were employed in the UK. Included in employee costs is remuneration paid to key management personnel as set out in note 25(i).

Included in other expenses are fees payable to TSB’s auditors as set out in the table below:

2020

£ million

2019

£ million

Fees payable to the Company’s auditor for the audit of the Company’s annual accounts 3.1 4.1

Fees payable to the Company’s auditor and its associates for other services:

Audit related assurance services 1.3 0.2

Total fees payable to TSB’s auditors 4.4 4.3

Audit related assurance services in 2020 reflect fees payable to the Company’s auditor for the audit the half year accounts, as required by TSB’s parent, Sabadell. In 2019, such fees were disclosed within amounts for the audit of the Company’s annual accounts.



15. Directors’ emoluments

The aggregate remuneration of the Directors during the year was as follows:

2020

£ 000

2019

£ 000

Remuneration paid to Directors in respect of qualifying services 2,699 2,660

Employer contributions to pension schemes (including cash paid in lieu) 287 232

Cash received under long-term incentive arrangements – 481

Total 2,986 3,373

The aggregate remuneration, including cash received under long-term incentive arrangements (2019 only), of the highest

paid director was £1,166,327 (2019: £1,442,660) for qualifying services as a TSB director.

The table below presents the number of Directors , who:

2020

Number

2019

Number

Exercised share options – –

Received shares under long term incentive schemes – 1

Accrued pension benefits under defined contribution pension schemes 2 2

16. Share-based payments

During 2020, expenses of £2.7 million (2019: £1.3 million) were recognised in respect of share based compensation

arrangements. Such arrangements are limited to the operation of a Share Incentive Plan (SIP) which provide employees

with the opportunity to own shares in Sabadell and the granting, where relevant, of shares to certain senior employees as

part of their recruitment arrangements.

As all share-based compensation arrangements involve an award of Sabadell shares, these arrangements are accounted

for as cash settled share-based payment arrangements resulting in the recognition of a liability. This liability is remeasured

monthly, with changes recognised in operating expenses, to reflect the latest Sabadell share price and the estimated

number of shares expected to vest. At 31 December 2020, £4.1 million (2019: £5.4 million) was recognised in respect of

share-based payment liabilities. An explanation of the instruments transacted to economically hedge TSB’s exposure to

share based payment liabilities is set out in note 25(ii).

TSB also operated a Sharesave scheme where eligible employees had the opportunity to enter into a contract to save up

to £500 per month and, at the maturity date, three years from the start of the savings contract, had the option to use these

savings to acquire shares in Sabadell. The options under the scheme vested on 1 October 2019 and employees had until

31 March 2020 to exercise their options after which time all remaining unvested options lapsed. Any participants who had

taken a payment holiday had a later maturity date. At 31 December 2020 no options remained outstanding. At 31 December

2019, the fair value of the options, determined using a Black Scholes option pricing model, was 8.0 pence and a liability of

£2.3 million was recognised on the consolidated balance sheet.

2020 2019

Bank

Number of

options

(Sabadell)

(000’s)

Weighted

average

exercise

price

(pence)

Number of

options

(Sabadell)

(000’s)

Weighted

average

exercise

price

(pence)

Outstanding at 1 January 7,955 77.68 11,990 77.68

Granted – – – –

Exercised (1,204) 77.68 (2,619) 77.68

Forfeited (6,751) 77.68 (780) 77.68

Cancelled – – (636) 77.68

Outstanding at 31 December – – 7,955 77.68

Exercisable at 31 December – – 7,955 77.68



17. Taxation

The table below sets out the credit/(charge) to UK corporation tax recognised in the income statement:

Bank

2020

£ million

2019

£ million

UK corporation tax

Current tax charge on (loss)/profit for the year – –

Adjustments in respect of prior years – 0.7

Current tax credit – 0.7

Deferred tax (note 18)

Origination and reversal of temporary differences:

Deferred tax charge on business transfers (20.5) (20.9)

Change in UK corporation tax rate 7.7 –

Accelerated capital allowances 0.7 0.5

Adjustments in respect of prior years 1.7 (0.7)

Deferred tax credit in relation to trading losses 57.3 3.8

Other (2.6) (2.6)

Deferred tax credit/(charge) 44.3 (19.9)

Taxation credit/(charge) 44.3 (19.2)

A reconciliation of the credit/(charge) that would result from applying the UK corporation tax rate to (loss)/profit before

taxation to the actual taxation credit/(charge) for the year is presented below:

Bank

2020

£ million

2019

£ million

(Loss)/profit before taxation (200.5) 45.4

Taxation credit/(charge) at applied UK corporation tax rate of 27.0% (2019: 27.0%) 54.1 (12.3)

Factors affecting charge:

Disallowed costs (19.7) (6.1)

Changes to UK corporation tax rates 7.7 (0.7)

Adjustments in respect of prior years 1.7 (0.1)

Other 0.5 –

Taxation credit/(charge) 44.3 (19.2)

The applied UK corporation tax rate of 27% includes the 8% bank surcharge on profits in excess of £25 million together

with the UK corporation tax rate of 19%. Disallowed costs primarily reflect estimated customer redress costs and certain

other costs associated with restructuring the Bank. Disallowed costs in 2019 primarily reflect restructuring costs.

During 2020, the UK corporation tax was substantively enacted at 19% for 2020 and for subsequent years. Prior to this,

the rate had been scheduled to reduce from 19% to 17% with effect from 1 April 2020. The effect of this was to increase

the value of the carried forward tax losses and temporary differences that will now be utilised when the rate is higher than

previous expected which increased the deferred tax asset by £7.7 million.



18. Deferred tax assets

The movement in deferred tax assets is as follows:


2020

£ million

2019

£ million

2020

£ million

2019

£ million

At 1 January 96.1 113.0 96.1 113.0

Restatement(1) – – (4.0) 2.4

Opening balance – restated 96.1 113.0 92.1 115.4

Income statement credit/(charge) (note 17) 44.3 (19.9) 48.3 (26.3)

Group relief (2.8) – (2.8) –

Amounts charged to equity:

Movements in fair value reserve 0.2 2.3 0.2 2.3

Movements in cash flow hedge reserve 6.7 0.7 6.7 0.7

At 31 December 144.5 96.1 144.5 92.1

Deferred tax assets are comprised as follows: Bank Bank Company Company

2020

£ million 2019

£ million 2020

£ million

2019

Restated(1)

£ million

Deferred tax arising on carried forward trading losses 102.0 46.0 102.0 42.0

Deferred tax arising on business transfers 20.5 38.0 20.5 38.0

Deferred tax in respect of the transition to IFRS 9 18.2 19.3 18.2 19.3

Deferred tax arising on cash flow hedge reserve 7.4 0.7 7.4 0.7

Revaluations of financial assets at fair value through other comprehensive income (4.4) (4.6) (4.4) (4.6)

Other temporary differences 0.8 (3.3) 0.8 (3.3)

Total deferred tax assets 144.5 96.1 144.5 92.1


Significant judgement

The valuation and assessment of recovery of deferred tax assets requires an estimate of the amount and timing of future

taxable profits. The level of estimated future taxable profits takes into account the Board approved medium term plan and

associated risk factors which estimated that the asset was recoverable within seven years. A number of sensitivities were

considered, including alternative forecast assumptions and execution risks associated with the Bank’s strategy, which

could result in a potential two year extension to the estimated recovery period. Based on this, management concluded it

remains appropriate to recognise the deferred tax asset in full.



Managing financial risk

Financial instruments are fundamental to the Bank’s activities and, as a consequence, the risks associated with

financial instruments represent a significant component of the risks faced by TSB. The primary risks affecting the

Bank through its use of financial instruments are: credit risk, liquidity risk, and market risk. A summary of the

Bank’s use of financial instruments and information about the management of these risks is presented below.

Accounting policies relevant to managing financial risk

(j) Derivative financial instruments and hedge accounting

All derivative financial instruments are recognised at their fair value. Fair values are obtained from quoted market prices in

active markets, including recent market transactions, and using valuation techniques, including discounted cash flow as

appropriate. Fair value is the exit price from the perspective of market participants who hold the asset or owe the liability

at the measurement date. Derivatives are carried on the balance sheet as assets when their fair value is positive and as

liabilities when their fair value is negative.

Changes in the fair value of derivatives are recognised immediately in the income statement, with the exception of

derivatives designated in a cash flow hedge. For derivatives in cash flow hedges, the effective portion of the change in fair

value is recognised in other comprehensive income until the point at which the hedged item affects profit or loss.

Hedge accounting

TSB elected to continue to apply the hedge accounting requirements of IAS 39 on adoption of IFRS 9. Hedge accounting

allows one financial instrument, generally a derivative such as an interest rate swap, to be designated as a hedge of

another financial instrument such as a loan or deposit or a portfolio of such instruments. At the inception of the hedge

relationship, formal documentation is drawn up specifying the hedging strategy, the hedged item and the hedging

instrument and the methodology that will be used to measure the effectiveness of the hedge relationship in offsetting

changes in the fair value of the cash flows.

In its application of the hedge accounting policy, TSB follows the requirements of the EU endorsed version of IAS 39

‘Financial Instruments: Recognition and Measurement’ which are not available in the version issued by the IASB specifically

relating to hedging core deposits, and the relaxation of effectiveness testing, such that a layer approach can be used in a

macro fair value hedge. The effectiveness of the hedging relationship is tested both at inception and throughout its life and

if at any point it is concluded that it is no longer highly effective in achieving its documented objective, hedge accounting

is discontinued. TSB designates certain derivatives as either hedges of the fair value of recognised assets or liabilities (fair

value hedges) or hedges of highly probable future cash flows attributable to recognised assets or liabilities (cash flow

hedges).

Fair value hedges

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income

statement, together with the changes in the fair value of the hedged asset or liability that are attributable to the hedged

risk. If the hedge no longer meets the criteria for hedge accounting, changes in the fair value of the hedged item attributable

to the hedged risk are no longer recognised in the income statement. The cumulative adjustment that has been made to

the carrying amount of the hedged item is amortised to the income statement using a straight line method over the period

to maturity. For micro fair value hedges, this is applied using a straight line method over the period to maturity, and for

macro fair value hedges, the cumulative adjustment is amortised over the period to expiry of the relevant repricing period.

Cash flow hedges

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is

recognised in other comprehensive income in the cash flow hedging reserve. The gain or loss relating to the ineffective

portion is recognised immediately in the income statement. Amounts accumulated in equity are reclassified to the income

statement in the periods in which the hedged item affects profit or loss. When a hedging instrument expires or is sold, or

when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time

remains in equity and is recognised in the income statement when the previously hedged cash flow is ultimately recognised

in the income statement.

Hedge accounting – IBOR reform

TSB’s accounting policy in respect of hedge accounting relationships directly affected by IBOR reform is on page 63 under

the heading IBOR reform.


Notes to the financial statements Managing financial risk (continued)

19. Credit risk

Credit risk is the risk of financial loss if a customer or counterparty to a financial instrument fails to meet its contractual

obligations. Credit risk appetite is set at Board level and is described and reported through a suite of metrics devised from

credit portfolio performance measures, and includes the use of various credit risk rating systems to measure the credit risk

of loans and advances to customers and banks at a counterparty level using three components: (i) the probability of default

by the counterparty on its contractual obligations; (ii) the exposure to the counterparty at default; and (iii) the likely loss

ratio on the defaulted obligations, the loss given default. The Bank uses a range of approaches to mitigate credit risk,

including policies, obtaining collateral, using master netting agreements and other credit risk transfers, such as asset sales.

The Bank’s credit risk exposure, which arises primarily in the United Kingdom, is set out below.

(i) Maximum credit exposure

The maximum credit risk exposure in the event of other parties failing to perform their obligations is presented below. No

account is taken of any collateral held and the maximum exposure to loss is considered to be the balance sheet carrying

amount or, for non-derivative off-balance sheet transactions, their contractual nominal amounts. The maximum exposure

to credit risk for financial assets that are subject to impairment requirements is set out below: Bank 2020 2020 2019 2019

Exposure

£ million

Credit

Quality

Exposure

£ million

Credit

Quality


Cash, cash balances at central banks and other demand deposits:

Cash 143.6 Not rated 160.1 Not rated

Balances with central banks 4,910.1 AA- 4,427.3 AA-

On demand deposits 2.6 At least A 5.4 At least BBB

Reverse repurchase agreements – – 201.1 AA-

Debt securities at amortised cost(1) 1,123.7 At least AA- 548.6 At least A

Loans and advances to customers 33,317.9 Note 19(ii) 31,075.8 Note 19(ii)

Loans to credit institutions 43.3 A+ 373.2 At least A+

Loans to central banks 120.9 AA- 96.1 AA-

Other advances 217.5 At least A- 279.6 At least BBB

Financial assets at fair value through other comprehensive income(2) 1,496.9 At least AA- 1,587.4 At least A

Financial assets subject to expected credit loss requirements 41,376.5 38,754.6

Derivative financial assets(3) 338.2 204.9

Total on-balance sheet financial assets 41,714.7 38,959.5

Lending commitments 6,251.5 Note 19(ii) 4,953.6 Note 19(ii)

Maximum credit risk exposure 47,966.2 43,913.1 Company 2020 2020 2019 2019

Exposure

£ million

Credit

Quality

Exposure

£ million

Credit

Quality


Cash, cash balances at central banks and other demand deposits:

Cash 143.6 Not rated 160.1 Not rated

Balances with central banks 4,910.1 AA- 4,427.3 AA-

On demand deposits 2.6 At least A 5.4 At least BBB

Reverse repurchase agreements – – 201.1 AA-

Debt securities at amortised cost(1) 1,123.7 At least AA- 548.6 At least A

Loans and advances to customers 33,317.9 Note 19(ii) 31,075.8 Note 19(ii)

Loans to credit institutions – – – At least A+

Loans to central banks 120.9 AA- 96.1 AA-

Other advances 217.5 At least A- 279.6 At least BBB

Financial assets at fair value through other comprehensive income(2) 1,496.9 At least AA- 1,587.4 At least A

Financial assets subject to expected credit loss requirements 41,333.2 38,381.4

Derivative financial assets(3) 338.2 176.0

Total on-balance sheet financial assets 41,671.4 38,557.4

Lending commitments 6,251.5 Note 19(ii) 4,953.6 Note 19(ii)

Maximum credit risk exposure 47,922.9 43,511.0

(1) Includes £482.7 million (2019: £362.3 million) rated AAA. (2) Includes £317.2 million (2019: £416.1 million) rated AAA. (3) At 31 December 2020, the net uncollateralised balance of derivative financial instruments was nil (2019: £43.4 million, as set out in

note 22, with counterparties rated A+).



19. Credit risk (continued)

(ii) Credit quality of loans and advances to customers and lending commitments In assessing the credit quality of loans and advances to customers and lending commitments, TSB uses an internal rating scale which assigns a grade based on a customer’s 12 month expected probability of default (PD). The PDs used to assign a risk grade, as shown in the table below, are point in time PDs. This is different to the IFRS 9 PDs used to assess IFRS 9 staging and expected credit loss measurement which are adjusted to reflect the effect of forward looking economic scenarios. PD range PD range Internal

Lower Upper grading

Excellent quality 0% 1.200% 1-4

Good quality 1.201% 4.500% 5-6

Satisfactory quality 4.501% 14.000% 7-9

Lower quality 14.001% 20.000% 10

Below standard (including in default) 20.001% 100% 11-13

The table below sets out the credit quality, by stage, of gross loan and advances to customers:

2020 2019

Secured (retail)

Stage 1

£ million

Stage 2

£ million

Stage 3

£ million

POCI*

£ million

Total

£ million

Stage 1

£ million

Stage 2

£ million

Stage 3

£ million

POCI*

£ million

Total

£ million

Excellent quality 27,000.4 119.6 – 1.9 27,121.9 26,712.4 1,725.7 – 1.2 28,439.3

Good quality 451.9 382.5 – 69.5 903.9 29.2 102.2 – 65.9 197.3

Satisfactory quality 317.7 1,466.3 – 5.5 1,789.5 2.2 108.8 – 7.8 118.8

Lower quality 2.7 65.1 – 0.6 68.4 – 15.0 – 1.1 16.1

Below standard (including in default) 1.1 506.7 332.6 66.3 906.7 3.7 25.2 303.6 85.2 417.7

Gross carrying amount 27,773.8 2,540.2 332.6 143.8 30,790.4 26,747.5 1,976.9 303.6 161.2 29,189.2

Unsecured

Excellent quality 1,138.7 165.2 3.4 – 1,307.3 455.7 56.6 0.8 – 513.1

Good quality 219.2 257.9 4.2 – 481.3 734.3 241.0 2.4 – 977.7

Satisfactory quality 33.6 80.2 4.5 – 118.3 111.8 113.8 3.3 – 228.9

Lower quality 3.1 11.9 1.6 – 16.6 9.5 22.1 1.8 – 33.4

Below standard (including in default) 1.1 19.6 48.3 0.2 69.2 5.1 29.7 67.1 0.1 102.0

Gross carrying amount 1,395.7 534.8 62.0 0.2 1,992.7 1,316.4 463.2 75.4 0.1 1,855.1

Business banking

Excellent quality 198.1 – – – 198.1 68.9 3.3 – – 72.2

Good quality 123.3 0.9 0.1 124.3 37.7 0.9 – – 38.6

Satisfactory quality 232.5 15.1 – – 247.6 11.4 5.4 – – 16.8

Lower quality 29.9 29.9 – – 59.8 – – – – –

Below standard (including in default) 0.2 80.5 4.8 – 85.5 – – 3.5 – 3.5

Gross carrying amount 584.0 126.4 4.9 – 715.3 118.0 9.6 3.5 – 131.1

The table below sets out the credit quality, by stage, of lending commitments.

2020 2019

Commitments

Stage 1

£ million

Stage 2

£ million

Stage 3

£ million

POCI

£ million

Total

£ million

Stage 1

£ million

Stage 2

£ million

Stage 3

£ million

POCI

£ million

Total

£ million

Excellent quality 5,512.5 142.0 5.0 0.3 5,659.8 4,037.5 461.1 2.1 0.5 4,501.2

Good quality 294.6 173.4 1.9 18.0 487.9 220.0 76.7 1.5 16.4 314.6

Satisfactory quality 47.6 24.8 1.2 0.6 74.2 51.4 29.3 1.0 0.5 82.2

Lower quality 1.3 3.5 0.2 – 5.0 1.2 11.2 0.4 0.1 12.9

Below standard (including in default) – 2.2 21.0 1.4 24.6 0.5 3.3 36.7 2.2 42.7

Total 5,856.0 345.9 29.3 20.3 6,251.5 4,310.6 581.6 41.7 19.7 4,953.6



19. Credit risk (continued)

(iii) Collateral held as security for financial assets

Financial assets subject to expected credit loss requirements

The Bank holds collateral against loans and advances to customers in the form of mortgages over residential property and

second charges over business assets, including commercial and residential property. An analysis by loan-to-value (LTV) ratio of the Bank’s retail mortgage lending is presented below. The value of collateral

used in determining the LTV ratios has been estimated based upon the last actual valuation, adjusted to take into account

subsequent movements in house prices.

2020 2019

LTV of Secured (retail

Stage 1

£ million

Stage 2

£ million

Stage 3

£ million

POCI

£ million

Total

£ million

Stage 1

£ million

Stage 2

£ million

Stage 3

£ million

POCI

£ million

Total

£ million

Less than 70% 19,364.2 2,270.2 250.2 112.1 21,996.7 18,880.4 1,593.0 211.8 114.0 20,799.2

70% to 80% 5,539.9 189.4 40.9 20.7 5,790.9 4,476.4 212.4 48.3 25.2 4,762.3

80% to 90% 2,778.5 70.2 20.6 6.7 2,876.0 2,839.2 125.2 24.4 14.5 3,003.3

90% to 100% 79.1 5.5 14.1 3.7 102.4 537.6 35.2 9.7 5.4 587.9

Greater than 100% 12.1 4.9 6.8 0.6 24.4 13.8 11.1 9.5 2.1 36.5

Secured (retail) 27,773.8 2,540.2 332.6 143.8 30,790.4 26,747.4 1,976.9 303.7 161.2 29,189.2 The Bank does not take physical possession of properties or other assets held as collateral and uses external agents to

realise the value as soon as practicable to settle indebtedness. Any surplus funds are returned to the borrower or are

otherwise dealt with in accordance with appropriate insolvency regulations. No collateral is held in respect of retail credit

cards, overdrafts, or unsecured personal loans. For business banking lending, collateral primarily consists of second charges over commercial and residential property.

Where collateral is held, lending decisions are predominantly based on an obligor’s ability to repay from normal business

operations rather than reliance on any collateral provided. Collateral values are assessed at the time of loan origination

and reassessed if there is observable evidence of distress of the borrower. In respect of the £576.8 million of Bounce Back

loans, TSB benefits from a 100% guarantee from the British Business Bank. Financial assets at fair value through profit or loss (not subject to expected credit loss requirements)

Derivative financial assets of £338.2 million (2019: £205.4 million) are largely cash collateralised interest rate swaps

transacted through central clearing houses. The effect of the collateralisation is shown in note 22 under the heading

‘Offsetting financial assets and financial liabilities’.

(iv) Forbearance and loan modifications

The Bank operates a number of schemes to assist borrowers who are experiencing financial difficulties. Forbearance

solutions may offer relief in the form of reductions to contractual payments including freezes to interest payments, and for

customers who have longer term financial difficulties, term extensions and capitalisation of arrears. The Bank applies the European Banking Authority definition of forbearance and at 31 December 2020, forborne loans were

£301.3 million (2019: £301.8 million), of which £170.6 million (2019: £163.4 million) were credit impaired. At 31 December

2020, the allowance for loan losses held in respect of forborne loans was £26.3 million (2019: £20.2 million). During 2020 gross balances of £14.7 million (2019: £12.9 million) in respect of unsecured loans were subject to modification

of the original terms through the temporary freezing of customer interest obligations. At the time, the loans were categorised

as either stage 2 or 3 and the allowance for expected credit losses was measured at lifetime expected credit loss. These

resulted in modification losses of £0.8 million (2019: £0.7 million).

(v) COVID-19

In response to the COVID-19 pandemic, TSB introduced repayment holidays to enable customers to take a temporary

break from making loan repayments where they are experiencing, or are reasonably expected to experience, payment

difficulties caused by COVID-19. During the period of the repayment holiday, no further arrears are reported on customers’

records although interest on the deferred payments continues to accrue. At 31 December 2020, loans and advances to

customers include £5,140.4 million (secured retail: £4,922.7 million, unsecured: £204.4 million and business banking:

£13.3 million) where a repayment holiday had been granted in 2020 in response to the COVID-19 pandemic. Of this total

£3,015.4 million were stage 1, £1,898.2 million were stage 2, and £226.8 million were stage 3. At 31 December 2020, £411.5 million (secured retail: £371.8 million, unsecured: £26.4 million, and business banking: £13.3

million) relates to loans where the payment holidays remained in effect at the year end. As repayment holidays are available to all customers impacted by COVID-19 and are not tailored to individual borrower

circumstances, they are not included in the forbearance totals. As described on page 44, PMAs were applied to both the

gross loan stage and the allowance for loan losses to reflect the increased risk of credit losses due to payment holidays.



20. Liquidity risk

Definition and exposure

Liquidity risk is the risk that the Bank is unable to meet its liabilities as they fall due, or is unable to maintain regulator,

investor, customer or stakeholder confidence that this will be achieved. Liquidity risk is managed, monitored and measured

from both an internal and regulatory perspective.

Sources of funding

The Bank’s funding position is underpinned by its significant customer deposit base. The deposit base is made up of

customer current and savings accounts which, although mostly repayable on demand, have historically provided a stable

source of funding.

Risk appetite

The funding and liquidity risk appetite for the Bank is set and approved annually by the Board. Risk is reported against this

appetite through various metrics to enable the Bank to manage the funding and liquidity position. The risk appetite is

established under a liquidity risk management framework designed with the aim that the Bank has sufficient financial

resources of appropriate quality.

Measurement and monitoring

A series of measures are used across the Bank to monitor both short term and long term liquidity. Liquidity is measured

on a daily basis and reported internally. Daily liquidity reporting is supplemented by early warning indicators and a Liquidity

Contingency Plan. Monthly reporting procedures are in place to update and inform senior management. All liquidity policies

and procedures are subject to periodic independent internal oversight.

The table below presents the contractual residual maturities of the Bank assets and liabilities on the balance sheet:

Bank

At 31 December 2020

Up to 1

month

£ million

1-3

months

£ million

3-12

months

£ million

1-5 years

£ million

Over

5 years

£ million

Total

£ million

Financial liabilities measured at amortised cost:

Customer deposits 32,041.5 342.4 875.2 1,116.2 – 34,375.3

Borrowings from central banks 0.8 900.0 1,315.0 850.0 – 3,065.8

Debt securities in issue – 0.4 – 1,698.8 – 1,699.2

Subordinated liabilities – – 3.4 387.9 – 391.3

Lease liabilities – – 2.6 34.3 86.4 123.3

Other financial liabilities 51.6 – – – – 51.6

Derivative liabilities at fair value through profit or loss 2.4 0.3 9.8 157.0 130.2 299.7

Hedging derivative liabilities – 3.2 4.9 71.9 145.2 225.2

Other liabilities (1) 196.0 – 87.0 66.1 117.0 466.1

Total liabilities 32,292.3 1,246.3 2,297.9 4,382.2 478.8 40,697.5


Cash, cash balances at central banks 5,056.3 – – – – 5,056.3

Debt securities 3.1 0.6 1.5 379.7 738.8 1,123.7

Loans and advances to customers 877.1 288.6 1,354.6 6,676.4 24,121.2 33,317.9

Loans to credit institutions 41.8 – – 1.5 – 43.3

Loans to central banks 120.9 – – – – 120.9

Other advances 217.5 – – – – 217.5

Financial assets at fair value through other

comprehensive income 0.3 2.7 7.4 – 1,486.5 1,496.9

Derivative assets at fair value through profit or loss 0.8 0.6 5.8 180.7 10.4 198.3

Hedging derivative assets – – 4.4 70.6 64.9 139.9

Other assets (2) 175.3 3.4 21.2 168.7 339.1 707.7

Total assets 6,493.1 295.9 1,394.9 7,477.6 26,760.9 42,422.4

(1) Other liabilities comprise provisions, fair value adjustments for portfolio hedged risk and other liabilities.

(2) Other assets comprise fair value adjustments for portfolio hedged risk, property, plant and equipment, intangible assets, deferred tax assets and other assets.



20. Liquidity risk (continued)

Bank

At 31 December 2019

Up to 1

month

£ million

1-3

months

£ million

3-12

months

£ million

1-5 years

£ million

Over

5 years

£ million

Total

£ million


Customer deposits 27,325.5 220.3 1,094.9 1,541.7 – 30,182.4

Borrowings from central banks 8.5 – 10.0 4,465.0 – 4,483.5

Debt securities in issue – 44.5 383.3 1,248.5 – 1,676.3


Lease liabilities 2.1 4.3 17.8 55.0 62.6 141.8


Derivative liabilities at fair value through profit or loss 0.1 0.4 3.3 65.6 58.5 127.9

Hedging derivative liabilities – – 6.0 15.9 266.6 288.5

Other liabilities 205.9 – – – 52.2 258.1

Total liabilities 27,622.8 269.5 1,518.7 7,784.2 439.9 37,635.1


Reverse Repurchase agreements – 201.1 – – – 201.1

Debt securities 1.1 0.2 1.1 119.4 426.8 548.6

Loans and advances to customers 903.6 289.7 1,242.2 5,608.3 23,032.0 31,075.8

Loans to credit institutions – 247.8 64.6 60.8 – 373.2

Loans to central banks 96.1 – – – – 96.1

Other advances 279.6 – – – – 279.6

Financial assets at fair value through other comp,

income 0.3 1.9 8.4 - 1,576.8 1,587.4

Derivative assets at fair value through profit or loss 0.2 0.7 3.1 72.6 34.9 111.5

Hedging derivative assets – – 46.5 26.2 20.7 93.4

Other assets 4,740.5 2.4 10.5 81.8 334.0 5,169.2

Total assets 6,021.4 743.8 1,376.4 5,969.1 25,425.2 39,535.9

Expected cash flows on customer deposits and loans and advances to customers vary significantly from the contractual

cash flows shown in the table above. Customer deposits are largely repayable on demand but have proven to be a stable

source of funding. Loans and advances to customers comprise of a large proportion of mortgages which mature earlier

than the contractual maturity as customers take advantage of early redemption options.




Contractual maturities for financial liabilities form an important source of information for the management of liquidity risk.

The table below analyses financial liabilities and commitments by relevant contractual maturity grouping on an

undiscounted future cash flow basis, which includes estimated interest payments.

Bank

At 31 December 2020

Up to 1

month

£ million

1-3

months

£ million

3-12

months

£ million

1-5 years

£ million

Over

5 years

£ million

Total

£ million

Liabilities





Subordinated liabilities – – 396.1 – – 396.1

Lease liabilities – 0.2 6.4 17.3 75.5 29.4 128.8


Loan commitments 3,847.4 172.0 1,972.4 25.7 234.0 6,251.5

35,943.7 1,429.7 4,626.1 3,828.7 263.4 46,091.6

Derivative financial instruments - outflows 15.3 97.6 97.7 282.4 205.4 698.4

Derivative financial instruments - inflows (1.2) (1.9) (4.4) (45.0) (121.0) (173.5)

Total financial liabilities 35,957.8 1,525.4 4,719.4 4,066.1 347.8 46,616.5

Bank

At 31 December 2019

Up to 1

month

£ million

1-3

months

£ million

3-12

months

£ million

1-5 years

£ million

Over

5 years

£ million

Total

£ million

Liabilities




Debt securities in issue 30.4 15.8 354.9 1,298.9 – 1,700.0





30,994.8 408.4 2,531.9 7,813.1 291.7 42,039.9

Derivative financial instruments - outflows 20.5 63.8 154.6 422.1 370.7 1,031.7


Total financial liabilities 30,999.6 449.2 2,589.0 7,973.6 460.6 42,472.0




The table below analyses financial liabilities and commitments by relevant contractual maturity grouping on an

undiscounted future cash flow basis, which includes an estimated interest payment.

Company

At 31 December 2020

Up to 1

month

£ million

1-3

months

£ million

3-12

months

£ million

1-5 years

£ million

Over

5 years

£ million

Total

£ million

Liabilities





Subordinated liabilities – – 396.1 – – 396.1




35,943.7 1,429.7 4,626.1 3,828.7 263.4 46,091.6

Derivative financial instruments - outflows 15.3 97.6 97.7 282.4 205.4 698.4


Total financial liabilities 35,957.8 1,525.4 4,719.4 4,066.1 347.8 46,616.5

Company

At 31 December 2019

Up to 1

month

£ million

1-3

months

£ million

3-12

months

£ million

1-5 years

£ million

Over

5 years

£ million

Total

£ million

Liabilities









30,964.4 396.9 2,189.7 7,813.1 291.7 41,655.8

Derivative financial instruments - outflows 20.5 63.8 154.6 422.1 370.7 1,031.7


Total financial liabilities 30,969.2 437.7 2,246.8 7,973.64 460.6 42,087.9

The amounts shown are the net amounts for those derivatives that are net settled, which comprises the majority of TSB’s

derivative financial instruments. Gross nominal inflows and outflows are presented for derivatives that have simultaneous

gross settlement such as cross currency swaps

21. Capital resources

TSB maintains capital resources which exceed regulatory requirements and which seek to support the strategic growth of

the business, and ensure that TSB is able to absorb losses under stressed conditions. Capital risk is managed under a

framework where risk appetite is set and approved annually by the Board. A series of metrics are used to monitor capital

against early warning indicators with regular reporting in place to update and inform senior management. The table below

presents the Bank’s regulatory capital resources.


2020

£ million

2019

£ million

2020

£ million

2019

Restated(1)

£ million

Shareholder’s equity 1,724.9 1,900.8 1,724.9 1,911.7

Regulatory deductions (124.5) (66.5) (124.5) (62.7)

Common Equity Tier 1/Total Tier 1 capital 1,600.4 1,834.3 1,600.4 1,849.0

Tier 2 capital 432.8 393.5 432.8 393.5

Total capital resources 2,033.2 2,227.8 2,033.2 2,242.5




22. Market risk

Definition and exposure

Market risk is the risk of a reduction in earnings, value or reserves caused by changes in the prices of financial instruments.

The Bank’s market risk consists primarily of exposure to changes in interest rates. Interest rate risk is the risk that the net

value of, or net income arising from, the firm’s assets and liabilities is impacted as a result of changes to interest rates.

Interest rate risk can arise as a result of changes in customer behaviour, which may affect the maturity profiles of the

Bank’s assets and liabilities. The Bank’s exposure to changes in interest rates includes the margin between customer and

market rates. This includes the potential impact on earnings and value that could occur when, if rates fall, liabilities cannot

be re-priced as quickly or by as much as assets. Management and measurement

Risk exposure across the Bank is monitored monthly using, primarily, net interest income and earnings sensitivity. This

methodology considers all re-pricing mismatches in the current balance sheet and calculates the change in net interest

income that would result from a set of defined interest rate shocks. A limit structure exists to ensure that risks stemming

from residual positions or from changes in assumptions about customer behaviour remain within risk appetite. A 12 month view of the sensitivity of net interest income is calculated on the basis of TSB’s current consolidated balance

sheet with re-pricing dates adjusted according to behavioural assumptions. At 31 December 2020, the projected change

in 12 month net interest income in response to an immediate parallel shift in all relevant interest rates, market and

administered, would be an increase of £18.4 million (2019: £12.8 million) from a 25bps increase in rates, and a decrease

of £18.6 million (2019: £13.1 million) from a 25bps decrease. The measure assumes all interest rates, for all currencies

and maturities, move at the same time and by the same amount and does not take into account potential management

actions.

Derivative financial instruments

The Bank holds derivative financial instruments in the normal course of its banking business largely for interest rate risk

management and margin stabilisation purposes. The fair values and notional amounts of derivative instruments are

presented in the following table:

Bank 2020 2019

Derivative financial instruments at fair value through profit or loss

Contract/

notional

amount

£ million

Assets

fair value

£ million

Liabilities

fair value

£ million

Gain/(loss)

recognised in

profit or loss

£ million

Contract/

notional

amount

£ million

Assets

fair value

£ million

Liabilities

fair value

£ million

Gain(loss)

recognised in

profit or loss

£ million

Interest rate swaps 20,790.4 198.3 (299.7) (0.5) 22,917.2 110.7 (127.9) (14.7)

Foreign exchange forwards – – – – – – – 0.4

Equity forwards and options – – – (0.8) 6.5 0.8 – (1.0)

Total 20,790.4 198.3 (299.7) (1.3) 22,923.7 111.5 (127.9) (15.3)

Company 2020 2019

Derivative financial instruments at fair value through profit or loss

Contract/

notional

amount

£ million

Assets

fair value

£ million

Liabilities

fair value

£ million

Gain/(loss)

recognised in

profit or loss

£ million

Contract/

notional

amount(1)

£ million

Assets

fair

value(1)

£ million

Liabilities

fair value

£ million

Gain(loss)

recognised in

profit or loss(1)

£ million

Interest rate swaps 20,790.4 198.3 (299.7) (0.5) 25,290.0 125.4 (127.9) 9.0

Foreign exchange forwards – – – – – – – 0.4

Equity forwards and options – – – (0.8) 6.5 0.8 – (1.0)

Total 20,790.4 198.3 (299.7) (1.3) 25,296.5 126.2 (127.9) 8.4




22. Market risk (continued)

Bank and Company 2020 2019

Hedging derivative financial instruments

Contract/

notional

amount

£ million

Assets

fair value

£ million

Liabilities

fair value

£ million

Change in fair

value used for

calculating

hedge

ineffectiveness

£ million

Contract/

notional

amount

£ million

Assets

fair value

£ million

Liabilities

fair value

£ million

Change in fair

value used for

calculating

hedge

ineffectiveness

£ million

(Fair value hedges)

Interest rate risk

Interest rate swaps 18,658.5 139.9 (216.7) (116.8) 14,292.8 44.6 (281.1) (82.0)

(Cash flow hedges)

Interest rate and credit risk

Forward settlement contracts 140.9 – (2.2) (12.9) 190.0 2.9 – 1.8

Interest rate risk

Interest rate swaps 185.0 – (6.3) (21.4) 404.9 2.3 (7.4) (6.2)

Foreign exchange risk(1)

Cross currency rate swaps – – – – 270.1 43.6 – (20.0)

Total 18,984.4 139.9 (225.2) (151.1) 15,157.8 93.4 (288.5) (106.4)

(1) Foreign exchange risk is only in respect of the Bank and is not included in the Company financial statements.

Risk management

Where all relevant criteria are met, hedge accounting is applied to remove the accounting mismatch between the hedging

instrument and the hedged item. Where derivatives do not meet the hedge accounting criteria they are classified as 'fair

value through profit or loss’.

The Bank transacts derivatives largely to economically hedge interest rate risk. The Bank hedges LIBOR and SONIA

benchmark interest rate risk using both fair value hedges and cash flow hedges. As a result of the Bank’s dynamic hedging

strategies described below, the loss on derivatives at fair value through profit or loss in respect of interest rate risk of £0.5

million (2019: £14.7 million) should be considered in conjunction with the gain of £7.7 million (2019: £18.2 million) from the

amortisation of accumulated adjustments on the hedged items for which hedge accounting no longer applies.

IBOR reform

Background

IBOR reform refers to the global reform and replacement of interbank offered rates (IBOR) with alternative interest rate

benchmark reference rates. In order to manage TSB’s response, in 2019, a cross-functional Reference Rate Replacement

Steering Committee was established, reporting to the Asset & Liability Committee. The committee has primarily focused

on evaluating TSB’s exposure to financial instruments and other contracts that are impacted by IBOR reform and to oversee

their amendment or replacement. In addition the committee has considered the impact of IBOR reform on its interest rate

risk management to enable TSB to take the necessary actions in response ahead of the transition deadline.

The committee concluded that financial instruments impacted by IBOR reform were limited to two classes of financial

instruments, being a portfolio of interest rate swaps and the £500 million covered bond issued by TSB in December 2017.

These referenced LIBOR which is being replaced by the end of 2021.

In respect of the interest rate swaps that reference LIBOR, during 2020, swaps with a notional amount of £1,517.5 million

were replaced with economically equivalent swaps that reference SONIA. At 31 December 2020, the residual portfolio had

a notional amount of £17,144.2 million. Of these, £16,206.7 million mature within the next five years, £598.9 million mature

after five years but before ten years, and £338.6 million mature after ten years. Plans have been established to replace

the remaining swaps during 2021. As explained in note 2, during 2020 the terms of the covered bond were modified and

since September 2020 have referenced SONIA.




Hedge accounting policy

At 31 December 2020, interest rate swaps that reference LIBOR with a notional amount of £8,187.7 million (2019:

£11,771.3 million) were designated as fair value hedges of fixed rate exposures. The LIBOR linked covered bond was

previously in a cash flow hedge relationship that hedged the LIBOR based expected future cash flows. This hedge

relationship was dedesignated during 2020 when the covered bond was modified to SONIA. TSB considers these hedge

accounting relationships to be directly affected by IBOR reform as the interest rate risk designated in the fair value hedging

relationship is based on LIBOR, and the timing and amount of covered bond LIBOR cash flows are uncertain.

TSB applies the reliefs permitted by ‘Interest Rate Benchmark Reform – Amendments to IFRS 9, IAS 39 and IFRS 9’ (the

Phase 1 Amendment). As such, in assessing whether fair value hedge relationships are expected to be highly effective

(applying a prospective effectiveness assessment), it is assumed that the benchmark interest rate is not altered as a result

of IBOR reform. For a cash flow hedge of a forecast transaction, it is assumed that the benchmark interest rate will not be

altered as a result of IBOR reform for the purpose of asserting that the forecast transaction is highly probable. In

determining whether a previously designated forecast transaction is no longer expected to occur, TSB assumes that the

hedged interest rate benchmark cash flows will not be altered as a result of IBOR reform.

In 2020, the IASB issued ‘Interest Rate Benchmark Reform – Phase 2’ (the Phase 2 Amendment) which is effective from

1 January 2021, with early adoption permitted. This permits TSB’s fair value hedge relationships to persist where the

LIBOR swap was replaced with a SONIA equivalent, as the replacement is considered to be undertaken solely due to

IBOR reform and the replacement SONIA swap is economically equivalent to the original LIBOR swap. In addition, TSB

has applied the relief which permits amendment of the hedging documentation to reference SONIA and to revise the

description of the hedged item. TSB has also applied the relief which permits the amount in the cash flow hedge reserve

relating to a dedesignated hedge to be deemed to be based on the alternative benchmark rate, on which the future cash

flows will be based. TSB has elected to early adopt the Phase 2 Amendment, applying it retrospectively to its hedge

accounting relationships.

Hedge accounting overview

The profile of interest risk being managed is dynamic, changing in response to business activity and is economically hedged

with derivatives. Where natural offsets occur, these derivatives are not designated in hedge accounting relationships. The

remaining derivatives may be designated in a hedge accounting relationship to minimise profit volatility.

Hedge relationships are considered effective where changes in the hedged item offset changes in the hedging instrument

to within an 80% to 125% ratio. Effectiveness tests are performed at inception and on a monthly basis using either dollar

offset, linear regression or critical terms match, depending on the nature of the hedged items. Ineffectiveness arising on

hedge relationships can arise due to a number of factors which include, basis mismatch, maturity mismatch, credit valuation

adjustments and cash flow timing mismatch between the hedged item and hedging instrument.

Macro fair value hedge accounting –fixed rate mortgages and demand deposits

Pay fixed, receive floating interest rate swaps are typically designated as a portfolio fair value hedge of fixed rate mortgage

assets and receive fixed, pay floating derivatives are typically designated as a portfolio fair value hedge of fixed rate

customer deposits. As interest rate risk management is dynamic, the Bank’s approach is to dedesignate these hedge

relationships and redesignate new relationships on a monthly basis. The provisions of the EU endorsed version of IAS 39

mean that ineffectiveness arising due to unexpected prepayments need not be recognised though profit or loss, so long

as hedge designations are made in such a way to minimise their impact.

Micro fair value hedge accounting –subordinated debt and debt securities

The Bank has issued fixed rate subordinated debt and purchased fixed rate debt securities as part of its Treasury

management strategy, and these are hedged with interest rate swaps and designated in a fair value hedge.

Cash flow hedge accounting – forward bond sales

The Bank seeks to minimise interest rate and credit risk arising on purchased hold to collect and sell debt securities, using

forward settlement contracts. The sales proceeds represent a forecast transaction which is hedged by the forward contract.

At 31 December 2020, forward settlement agreements with a notional amount of £140.9 million (2019: £190.0 million) were

expected to mature within one year (2019: within one year) at a price of 160% of the notional amount (2019: 123%).




Cash flow hedge accounting – covered bonds

Interest rate risk on issued floating rate covered bonds is hedged using interest rate swaps that exchange floating rate

cash flows for fixed rate cash flows. At 31 December 2020, hedged forecast covered bond cash flows were expected to

mature after five years.

Cash flow hedge accounting – foreign currency debt securities in issue:

TSB previously issued Euro denominated floating rate securitisation notes and as a result was exposed to foreign currency

risk as the Bank’s functional currency is pounds sterling. The Bank hedged the foreign currency exposure via cross

currency interest rate swaps that exchanged floating rate euro cash flows and principal for floating rate sterling cash flows

and principal. At 31 December 2020, these issuances had matured, however in 2019, cross currency swaps with a notional

amount of: £270.1 million were expected to mature within 1 year. The average exchange rate applicable to these cross

currency swaps in 2019 was £1/€1.14. Exposures covered by hedging accounting strategies The following table contains details of the hedged exposures covered by The Bank’s hedging strategy.

Bank and Company 2020

Carrying

amount of hedged

item

assets/(liability)

£ million

Accumulated

fair value

hedge adj.

on hedged item

£ million

Balance sheet line item

that includes the hedged item

Change in fair

value for

calculating hedge

ineffectiveness

£ million

Cash flow

hedge reserve

continuing

hedges

£ million

Interest rate risk (Fair value hedges)

Portfolio hedged risk:

Demand deposits (6,123.5) (117.0) Customer deposits (69.9) n/a

Fixed rate mortgages 10,545.4 80.2 Loans & adv to customers 58.4 n/a

Individual hedged risk:

Fixed rate subordinated liabilities (391.3) (3.0) Subordinated liabilities 4.9 n/a

Debt securities 1,271.0 – Financial assets at FVOCI 102.3 n/a

Debt securities 898.0 31.2 Financial assets at amortised cost 19.8 n/a

115.5 n/a

Interest rate / credit risk (Cash flow hedges)

Debt securities 225.8 n/a Financial assets at FVOCI 12.9 (2.2)

Interest rate (Cash flow hedges)

Covered bonds issued 185.0 n/a Debt securities in issue 21.1 (25.3)

2019 £ million £ million

Balance sheet line item

that includes the hedged item £ million £ million

Interest rate risk (Fair value hedges)

Portfolio hedged risk:

Demand deposits (6,335.9) (52.2) Customer deposits (53.6) n/a

Fixed rate mortgages 6,309.2 20.5 Loans & adv to customers 48.0 n/a

Individual hedged risk:

Fixed rate subordinated liabilities (395.9) (7.9) Subordinated liabilities 2.5 n/a

Debt securities 1,354.7 – Financial assets at FVOCI 78.6 n/a

Debt securities 317.3 11.4 Financial assets at amortised cost 9.1 n/a

1,249.4 (28.2) 84.6 n/a

Interest rate / credit risk (Cash flow hedges)

Debt securities 232.8 n/a Financial assets at FVOCI (6.2) 2.9

Interest rate (Cash flow hedges)

Covered bonds issued 404.9 n/a Debt securities in issue 2.9 (5.8)

Foreign exchange risk (Cash flow hedges)(1)

Securitisation notes issued 270.1 n/a Debt securities in issue 20.0 0.2 (1) Foreign exchange risk is only in respect of the Bank and is not included in the Company financial statements.

The amount of fair value hedge adjustments remaining on the balance sheet for hedged items that have ceased to be

adjusted for hedging losses is £116.0 million (2019: £108.8 million).



Managing financial risk (continued)


Hedge accounting ineffectiveness

The following table contains information regarding the effectiveness of the hedging relationships designated by the Group,

as well as the impacts on profit or loss and other comprehensive income: Bank and Company

Amounts reclassified from

reserves to P&L as:

2020

Hedge

ineffectiveness

recognised in P&L

£ million

Gain/(loss)

recognised in

OCI

£ million

P&L line item that

includes hedge ineffectiveness

Hedged item

affected P&L

£ million

P&L line item

that includes

reclassified

amount

£ million

Interest rate risk (Fair value hedges) (1.3) – Gains from hedge accounting n/a n/a

Interest rate / credit risk (Cash flow hedges) – (12.9) n/a 7.7 Other income

Interest rate (Cash flow hedges) (0.3) (21.1) Gains from hedge accounting 1.7 Other income

Foreign exchange risk (Cash flow hedges) (1) – 12.5 n/a (12.3) Other income

(1.6) (21.5) n/a (2.9)

2019

Interest rate risk (Fair value hedges) 2.6 – Gains from hedge accounting n/a

Interest rate / credit risk (Cash flow hedges) – 1.8 n/a 3.6 Other income

Interest rate risk (Cash flow hedges) – (6.2) n/a 0.3 Other income

Foreign exchange risk (Cash flow hedges) (1) – (20.0) n/a 20.5 Other income

2.6 (24.4) n/a 24.4

(1) Foreign exchange risk is only in respect of the Bank and is not included in the Company financial statements. Gains from hedge accounting in the income statement of £5.8 million (2019: £20.8 million) comprise hedge ineffectiveness

of £(1.6) million (2019: £2.6 million) and £7.4 million (2019: £18.2 million) of amortisation of de-designated cash flow

hedges and fair value hedge adjustments on hedged items for which hedge accounting had previously been discontinued.

Reconciliation of reserves in respect of hedge accounting

The following table shows a reconciliation of each component of equity and an analysis of other comprehensive income in

respect of hedge accounting: Bank and Company 2020 2020 2019 2019

Fair value

reserve

£ million

Cash flow

hedge reserve(1)

£ million

Fair value

reserve

£ million

Cash flow

hedge reserve(1)

£ million

Balance as at 1 January 13.6 (2.5) 18.6 (3.2)

Amounts recognised in other comprehensive income:

Interest rate risk (fair value hedge)

Changes in fair value of purchased debt securities 117.0 n/a 95.9 n/a

Accumulated fair value hedge adjustment (102.2) n/a (78.6) n/a

Net amounts reclassified to profit or loss (17.0) n/a (24.6) n/a

Taxation 0.2 n/a 2.3 n/a

Interest rate and credit risk (cash flow hedges)

Effective portion of changes in fair value of forward contracts n/a (12.9) n/a 1.8

Amounts reclassified from reserves to profit or loss n/a 7.7 n/a 3.6

Taxation n/a 1.4 n/a (0.7)

Interest rate (cash flow hedges)

Effective portion of changes in fair value of interest rate swaps n/a (21.1) n/a (6.2)

Amounts reclassified from reserves to profit or loss n/a 1.7 n/a 0.3

Taxation n/a 5.3 n/a 1.4

Foreign exchange risk (cash flow hedges)

Effective portion of changes in fair value of cross currency swaps n/a 12.5 n/a (20.0)

Amounts reclassified from reserves to profit or loss n/a (12.3) n/a 20.5

Balance as at 31 December 11.6 (20.2) 13.6 (2.5)

(1) The cash flow hedge reserve in respect of the Company had a balance of £20.2 million (2019: £(2.3) million. Movements during 2020 are set out in the table above with the exception of foreign exchange risk.




Offsetting financial assets and financial liabilities

The following information relates to financial assets and liabilities which have not been set off but for which there are

enforceable master netting agreements in place with counterparties.

Bank

Related amounts where set off in

the balance sheet is not permitted

At 31 December 2020

Gross

amounts

£ million

Amounts

offset

£ million

Net amounts

reported on

the balance

sheet

£ million

Related financial

instrument amounts

not offset

£ million

Cash

collateral

received/

pledged(1)

£ million

Potential

Net amount

£ million

Derivative financial assets 338.2 – 338.2 (338.2) – –

Reverse repurchase agreements 225.8 (225.8) – – – –

Other assets 367.2 (192.6) 174.6 – – 174.6

Derivative financial liabilities (524.9) – (524.9) 338.2 186.7 –

Repurchase agreements (225.8) 225.8 – – – –

Other liabilities (note 31) (388.6) 192.6 (196.0) – – (196.0)

At 31 December 2019

Derivative financial assets 204.9 – 204.9 (157.9) (3.6) 43.4

Reverse repurchase agreements 201.1 – 201.1 (190.7) (0.4) 10.0

Other assets 338.9 (192.6) 146.3 – – 146.3



(1) Collateral amounts (cash and non-cash financial collateral) are reflected at their fair value and this amount is limited to the net balance sheet exposure in order to exclude any over collateralisation. The collateral amount presented includes non-cash collateral of £8.4 million.

Company

Related amounts where set off in

the balance sheet is not permitted

At 31 December 2020

Gross

amounts

£ million

Amounts

offset

£ million

Net amounts

reported on

the balance

sheet

£ million

Related financial

instrument amounts

not offset

£ million

Cash

collateral

received/

pledged(1)

£ million

Potential

Net amount

£ million

Derivative financial assets 338.2 – 338.2 (338.2) – –

Reverse repurchase agreements 225.8 (225.8) – – – –

Other assets 410.4 (192.6) 217.8 – – 217.8


Repurchase agreements (225.8) 225.8 – – – –

Other liabilities (note 31) (388.5) 192.6 (195.9) – – (195.9) At 31 December 2019

Derivative financial assets(2) 176.0 – 176.0 (157.6) (3.6) 14.8

Reverse repurchase agreements 201.1 – 201.1 (190.7) (0.4) 10.0

Other assets 338.9 (192.6) 146.3 – – 146.3



(1) Collateral amounts (cash and non-cash financial collateral) are reflected at their fair value and this amount is limited to the net balance sheet exposure in order to exclude any over collateralisation. The collateral amount presented includes non-cash collateral of £8.4 million




Other important disclosures

Accounting policies relevant to this section

(k) Share capital

Shares are classified as equity instruments when there is no contractual obligation to deliver cash or other assets to another

entity and the shares present a residual interest in the net assets of the issuer. Ordinary shares are classified as equity.

(l) Provisions and contingent liabilities and assets

Provisions are recognised in respect of present obligations arising from past events where it is probable that outflows of

resources will be required to settle the obligations and they can be reliably estimated.

Contingent liabilities are possible obligations whose existence depends on the outcome of uncertain future events or those

present obligations where the outflows of resources are uncertain or cannot be measured reliably. Contingent liabilities are

not recognised in the financial statements but are disclosed unless they are remote.

Contingent assets are possible assets that arise from past events and whose existence will be confirmed only by the

occurrence of one or more uncertain future events not wholly within TSB's control. These are recognised only when it is

virtually certain that an inflow of economic benefits will arise.

(m) Premises and equipment

Property, plant and equipment are recognised at cost less accumulated depreciation. Cost includes the original purchase

price of the assets and the costs attributable to bringing the asset into working condition for its intended use. Subsequent

expenditure is capitalised only if it is probable that future economic benefits associated with the expenditure will flow to

TSB. The value of land (included in premises) is not depreciated. Depreciation on other premises and equipment is

calculated using the straight-line method to allocate the difference between the cost and the residual value over their

estimated useful lives, as follows:

• Freehold premises and leasehold right of use assets: shorter of 50 years or the remaining period of the lease.

• Leasehold improvements: shorter of 10 years and, if lease renewal is not likely, the remaining period of the lease.

• Fixtures and furnishings: 0-10 years.

• Other equipment and motor vehicles: 2-8 years.

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Assets

are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be

recoverable. In the event that an asset’s carrying amount is determined to be greater than its recoverable amount it is

written down immediately. The recoverable amount is the higher of the asset’s fair value less costs to sell and its value in

use.

(n) Leases

At inception of a contract TSB assesses whether a contract is, or contains, a lease. A contract is, or contains a lease if the

contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To

assess whether a contract conveys the right to control the use of an identified asset, TSB assesses whether: (a) the

contract involves the use of an identified asset; (b) TSB has the right to substantially all of the economic benefits from use

of the asset throughout the period of use; and (c) TSB has the right to direct the use of the asset.

At inception or on reassessment of a contract that contains a lease component, TSB allocates the consideration in the

contract to each lease component on the basis of their relative stand-alone prices.

TSB recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially

measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or

before the commencement date.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the

earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right-

of-use assets are determined on the same basis as those of property and equipment. The right-of-use asset is written

down by any impairment losses, for example where a leased property will be closed before the end of the lease term, and

is adjusted for certain remeasurements of the lease liability. No lease liability or related right of use asset is recognised in

respect of short term leases, of less than one year, or leases of low value assets. As permitted by accounting standards,

the cost of such leases are expensed as incurred.


Notes to the financial statements Other important disclosures (continued)

Accounting policies relevant to this section (continued)

(n) Leases (continued)

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement

date, discounted using TSB Group’s incremental borrowing rate. The lease liability is measured at amortised cost using

the effective interest method. It is remeasured when there is a change in future lease payments. When the lease liability is

remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is

recognised in the consolidated income statement if the carrying amount of the right-of-use asset has been reduced to zero.

(o) Intangible assets

Intangible assets held by TSB consist of internally developed computer software which is held at cost less accumulated

amortisation and impairment. Software development costs are capitalised if it is probable that the asset created will

generate future economic benefits. Costs incurred to establish technological feasibility or to maintain existing levels of

performance are recognised as an expense.

Computer software intangible assets are amortised using the straight line method over their estimated useful lives of

between 3 and 5 years. Amortisation commences when the assets are ready for their intended use. Estimated useful lives

are reviewed annually and adjusted, if appropriate, in the light of technological developments, usage and other relevant

factors. Computer software is reviewed for indicators of impairment at each reporting date and whenever events or changes

in circumstances indicate that the carrying amount may not be recoverable. Where the carrying amount is not recoverable

the asset is written down immediately to the estimated recoverable amount.

23. Shareholder’s equity

Bank

Share

capital

£ million

Share

premium

£ million

Capital

reserve

£ million

Fair value

reserve

£ million

Cash flow

hedging reserve

£ million

Retained

profit

£ million

Balance at 1 January 2019 79.4 195.6 412.8 18.6 (3.2) 1,175.7

Net change in fair value reserve – – – (5.0) – –

Net change in cash flow hedging reserve – – – – 0.7 –

Profit for the year – – – – – 26.2

Balance at 31 December 2019 79.4 195.6 412.8 13.6 (2.5) 1,201.9


Net change in cash flow hedging reserve – – – – (17.7) –

Loss for the year – – – – – (156.2)

At 31 December 2020 79.4 195.6 412.8 11.6 (20.2) 1,045.7

Company

Share

capital

£ million

Share

premium

£ million

Capital

reserve

£ million

Fair value

reserve

£ million

Cash flow

hedging reserve

£ million

Retained

Profit

Restated(1)

£ million

At 1 January 2019 79.4 195.6 412.8 18.6 (2.5) 1,175.7

Restatement(1) – – – – – (6.6)

At 1 January 2019 - restated 79.4 195.6 412.8 18.6 (2.5) 1,169.1


Net change in cash flow hedging reserve – – – – 0.2 –

Profit for the year (restated) – – – – – 43.5

At 31 December 2019 79.4 195.6 412.8 13.6 (2.3) 1,212.6


Net change in cash flow hedging reserve – – – – (17.9) –

Loss for the year – – – – – (166.9)

At 31 December 2020 79.4 195.6 412.8 11.6 (20.2) 1,045.7




23. Shareholder’s equity (continued)

At 31 December 2020 and 2019, TSB Bank plc had in issue 7,945,000,100 one pence ordinary shares authorised, allotted

and fully paid up.

The capital reserve represents a capital contribution received in 2013 from a, then, parent company.

The fair value reserve represents the unrealised change in the value of financial assets at fair value through other

comprehensive income since the instrument’s initial recognition.

The cash flow hedging reserve represents the cumulative gains and losses on effective cash flow hedging instruments that

will be recycled to the income statement when the hedged transactions affect profit or loss.

24. Contingent liabilities

Significant judgement

Regulatory and conduct matters

During 2018, the FCA and PRA commenced a formal joint investigation in connection with the handling of the migration of

data and IT systems. This investigation is ongoing and it is not yet possible to determine its outcome

Further, as explained in note 30, management and the FCA is investigating conduct related matters in TSB’s collection

and recoveries function for which a provision covering the estimated redress costs has been recognised. It is not, however,

currently possible to conclude if any regulatory penalty will be levied and therefore no costs for an estimated penalty have

been recognised in these financial statements.



25. Related party transactions

The Bank’s related parties include key management personnel, Sabadell and other Sabadell Group companies.

(i) Key management personnel

Key management personnel are those persons having authority and responsibility for planning, directing and controlling

the activities of the Bank which is the Board and Executive Committee. Key management personnel compensation is

shown in the table below.


2020

£ 000

2019

£ 000

2020

£ 000

2019

£ 000

Short term employee benefits 5,597 7,448 5,597 7,448

Post-employment benefits 730 808 730 808

Other long term benefits – 765 – 765

Share-based payments – 1,084 – 1,084

Payments for loss of office 459 1,170 459 1,170

Total 6,786 11,275 6,786 11,275

The decrease in compensation payable to key management personal in 2020 largely reflects the absence of variable

reward costs.

The tables below detail, on an aggregated basis, related party transactions, balances outstanding at the year end and

related income and expense in respect of key management personnel.


2020

£ 000

2019

£ 000

2020

£ 000

2019

£ 000

Loans

At 1 January 11 5 11 5

Advances (includes key management personnel appointed during the year) 216 87 216 87

Interest charged during the year – – – –

Repayments made during the year (including key management personnel resigned

during the year) (194) (81) (194) (81)

At 31 December 33 11 33 11 The loans attracted interest at customer rates and were made in the ordinary course of business. Expected credit losses

are assessed to be immaterial.


2020

£ 000

2019

£ 000

2020

£ 000

2019

£ 000

Deposits

At 1 January 1,797 1,377 1,797 1,377

Deposits made during the year (includes key management personnel appointed

during the year) 4,471 5,900 4,471 5,900

Interest expense on deposits 7 6 7 6

Withdrawals made during the year (including key management personnel resigned

during the year) (4,361) (5,486) (4,361) (5,486)

At 31 December 1,914 1,797 1,914 1,797 Deposits placed by key management personnel are at customer rates and were made in the ordinary course of business.



25. Related party transactions (continued)

(ii) Transactions and balances with TSB Group companies

Amounts due from TSB Banking Group plc, the Company’s immediate parent company, totalled £18.3 million (2019:

£14.9 million) primarily arise from the payment and recharge, in the normal course of business, of certain costs of TSB

Banking Group plc and the funding by the Company of collateral balances required to be deposited by TSB Banking Group

plc.

Amounts due from TSB Banking Group Employee Share Trust (EST) totalled £1.6 million (2019: £3.6 million) reflecting an

interest free loan to enable the EST to acquire shares in respect of the Bank’s share based compensation schemes.

Amounts receivable from/(due to) other Bank companies by the Company were £43.2 million (2019: £(10.4) million).

(iii) Transactions and balances with Sabadell Group companies

Operational IT costs

Operating expenses of £124.8 million (2019: £167.0 million) were incurred in respect of services provided by Sabis, TSB’s

parent company’s IT supplier, under the OSA for running and developing the banking platform. The decrease during 2020

reflects that in December 2019, as part of the strategy to take direct management of suppliers of IT services, TSB entered

into an agreement with IBM to provide IT services to TSB. The contract became effective from 1 January 2020 and these

services became operational on a phased basis throughout 2020. These services were previously provided by Sabis under

the OSA which has been amended to remove the relevant services with effect from the date that IBM’s service became

operational.

Residual IT Migration related balances

In connection with the IT migration in 2018, the MSA and OSA contracts provide TSB with the right to seek recovery of

eligible losses for breach of contract up to the level of liability caps in each agreement. The respective parties have reached

provisional agreement, subject to mutual reservations of rights while negotiations are concluded, to recognise an aggregate

estimated recovery under the agreements of £192.6 million (2019: £192.6 million), reflecting the maximum recovery amount

under the contracts. TSB intends to settle on a net basis and consequently, the residual MSA liability of £100.0 million

(2019: £100.0 million) has been presented on the statement of financial position net of the recovery of £100.0 million (2019:

£100.0 million). The amount payable to Sabis in respect of the OSA and other change services of £113.9 million (2019:

£95.2 million) is presented net of recovery of £92.6 million (2019: £92.6 million). Taken together, the aggregate liability to

Sabis recognised on the consolidated balance sheet is £21.3 million (2019: £2.6 million) (note 31).

Issuance of senior unsecured debt securities

In December 2020, the Company issued £450.0 million of floating rate notes June 2023 to its parent company, TSB

Banking Group plc, at an issue price of 100% of the principal amount. The notes pay interest at SONIA plus 2.1%. Interest

expense of £0.1 million was recognised in 2020 and was payable at 31 December 2020.

Economic hedging of share based compensation liability

At 31 December 2019, TSB held options from Sabadell to acquire 8.3 million Sabadell shares at an exercise price of 77.68p

in order to hedge the risk associated with the TSB Sharesave scheme. These options had a fair value of £0.8 million at 31

December 2019 and Sabadell had placed cash collateral of £1.4 million. At 31 December 2020, no options remained

outstanding under the TSB Sharesave scheme (note 16).

Other transactions and balances

The Company’s ultimate parent, Sabadell, acts as an intermediary in respect of international payments and the Company

has nostro accounts as a result of this arrangement which had a net balance due from Sabadell of £1.9 million (2019: £4.9

million).

(iv) Subsidiary undertakings

The following entities are accounted for as subsidiary companies of TSB Bank plc as it exercises control of each entity

under IFRS 10 Consolidated Financial Statements. The registered office of each of these entities is 35 Great St Helen’s,

London, EC3A 6AP: • Duncan Holdings 2015-1 Limited and its subsidiary Duncan Funding 2015-1 plc (in liquidation);

• Duncan Holdings 2016-1 Limited and its subsidiary Duncan Funding 2016-1 plc (in liquidation);

• TSB Covered Bonds LLP, TSB Covered Bonds (LM) Limited; and TSB Covered Bonds (Holdings) Limited.



26. Property and equipment

Bank and Company

Property

£ million

Equipment

£ million

Right of use

leasing

asset

£ million

Total

£ million

Cost

At 1 January 2019 231.7 111.7 163.0 506.4

Additions 17.1 4.7 13.7 35.5

Disposals (3.0) (5.0) – (8.0)

Lease term remeasurement – – (6.6) (6.6)

Write-offs – – (2.8) (2.8)

At 31 December 2019 245.8 111.4 167.3 524.5

Additions 10.5 23.8 5.1 39.4

Disposals (22.3) (12.4) (5.2) (39.9)

Lease term remeasurement – – 1.5 1.5

At 31 December 2020 234.0 122.8 168.7 525.5

Accumulated depreciation

At 1 January 2019 108.1 72.2 – 180.3

Depreciation charge for property and equipment (note 14) 19.1 7.2 – 26.3

Depreciation charge for right of use asset (note 14) – – 28.2 28.2

Write-offs (1.4) (1.6) (0.5) (3.5)

At 31 December 2019 125.8 77.8 27.7 231.3

Depreciation charge for property and equipment (note 14) 27.8 14.0 – 41.8

Depreciation charge for right of use asset (note 14) – – 25.8 25.8

Disposals (19.3) (12.3) (0.7) (32.3)

At 31 December 2020 134.3 79.5 52.8 266.6

Carrying amount

At 31 December 2019 120.0 33.6 139.6 293.2

At 31 December 2020 99.7 43.3 115.9 258.9



27. Lease liabilities

TSB Group’s leasing activity primarily reflects leases of various offices and bank branch properties. These lease

arrangements will often contain renewal options and rent escalation clauses, although the effect of these is not material.

No arrangements have been entered into for contingent rental payments. The tables below set out details of the amounts

recognised in the financial statements in respect of leases:

Lease liability

Property

2020

£ million

Property

2019

£ million

Balance at 1 January 141.8 171.9

Additions 5.1 13.7

Lease term remeasurement 1.5 (6.6)

Interest expense for the year 1.3 1.6

Lease payments made in the year (26.4) (38.8)

Carrying amount at 31 December 123.3 141.8

28. Intangible assets

Bank and Company

2020

£ million

2019

£ million

Cost

At 1 January 30.5 22.9

Additions 35.9 7.6

At 31 December 66.4 30.5

Accumulated amortisation

At 1 January 10.2 4.5

Amortisation charge for the year (note 14) 6.7 5.7

At 31 December 16.9 10.2

Carrying amount 49.5 20.3

29. Other assets


2020

£ million

2019

£ million

2020

£ million

2019

£ million

Other assets and prepayments 143.8 113.4 143.8 113.4

Amounts recoverable under customer remediation indemnity (note 30) 10.9 14.4 10.9 14.4

Amounts due from other TSB Group companies (note 25) 19.9 18.5 63.1 18.5

Total other assets 174.6 146.3 217.8 146.3



30. Provisions

Bank and Company

Restructuring

provision(2)

£ million

Customer

redress

provisions

£ million

Operational

losses

provision

£ million

Credit

impairment

provisions

£ million

Total

£ million

At 1 January 2020 28.5 19.6 1.1 2.6 51.8

Transfers(1) – – – 15.3 15.3

Charge to the income statement 64.0 56.2 – 1.3 121.5

Reversals to the income statement (2.3) (2.9) – – (5.2)

Utilisation (22.4) (6.8) (1.1) – (30.3)

At 31 December 2020 67.8 66.1 – 19.2 153.1

(1) During 2020, the methodology for allocating expected credit losses on revolving facilities was changed such that ECL in excess of a customer’s drawn balance is now presented in the credit impairment provision. This change resulted in the transfer of £15.3 million from the allowance for credit impairment losses to the credit impairment provision.

(2) Included in the net charge to the income statement of £61.7 million, is £39.7 million reported in severance costs and £22.0 million reported in rates, maintenance and other premises expenses in note 14.

Significant estimates

Customer redress provisions

During 2020, management and the FCA commenced a review of support treatments offered to some customers who are,

or were, in arrears and being serviced by TSB’s collections and recoveries department. While not yet complete, this has

identified an indicative early view of potentially impacted customers over a period from 2013 to 2020 who may have suffered

either financial loss or distress and inconvenience. The assessment of the potential cost of customer redress, including

compensatory interest, and related operational costs are estimated to lie within a range of £53.1 million to £57.4 million

and are dependent on the assumed rates of redress and range of remediation strategies deployed. A provision of £55.0

million has been recognised and is expected to be utilised over the next two to three years. As the assessment of the

potential costs of redress continues to take place, estimating the amount of the provision requires judgement, particularly

with respect to the number of customers who may have been affected, the estimated financial loss suffered by customers

and the estimated rates of redress.

In respect of other customer redress matters, TSB is largely protected from losses arising from historic misconduct under

an indemnity provided by Lloyds Bank plc. However, TSB retains the primary liability for the alleged misconduct to its

customers and a provision for customer remediation of £11.1 million (2019: £19.6 million) is carried. A recoverable of

£10.9 million (2019: £14.4 million) has been recognised under the indemnity provided by Lloyds Bank plc (note 29). The

size of the liability follows an assessment of emerging themes in customer complaints, an assessment of broader industry

commentary and discussions with regulators. The ultimate cost and timing of payments are uncertain as a result of the

inherent difficulties in estimating factors such as future levels of customer complaints and remediation settlements. The

provision represents management’s current best estimate.

Restructuring provision

At 31 December 2020, TSB carried provisions of £67.8 million (2019: £28.5 million) in respect of estimated costs to

restructure the Bank as part of TSB’s strategy. This included estimated costs in respect of the closure of 164 branches that

were announced in September 2020, residual costs in respect of an earlier phase of branches closures announced in 2019

and the estimated severance costs arising from organisational change across a number of head office functions. The

amounts are expected to be settled in 2021.

Estimating the amount of the provision requires judgement, particularly with respect to the estimated costs of branch

decommissioning costs and dilapidation costs in respect of leasehold properties. In estimating the provision, experience

gained from recent branch closures was used, together with supporting evidence from property advisors. An

increase/decrease of 10% to the average branch decommissioning costs and to the dilapidation rate per leasehold branch

would have increased/decreased the provision balance at 31 December 2020 by £2.4 million.



31. Other liabilities

Bank

2020

£ million

2019

£ million

Amounts payable to Sabadell Group companies (note 25) 21.3 2.6

Amounts payable to other TSB Group companies – 0.7

Accruals and deferred income 87.6 70.1

Share based payment liability 4.1 5.4

Other creditors 83.0 75.3

Total other liabilities 196.0 154.1

Company

2020

£ million

2019

£ million

Amounts payable to Sabadell Group companies (note 25) 21.3 2.6

Amounts payable to other TSB Group companies (note 25) – 10.4

Accruals and deferred income 87.6 70.1

Share based payment liability 4.1 5.4

Other creditors 82.9 75.1

Total other liabilities 195.9 163.6

Significant judgement – MSA and OSA contract liabilities

The MSA and OSA contracts provide TSB with the right to seek recovery of eligible losses for breach of contract up to the

level of liability caps in each agreement. The parties have reached provisional agreement, subject to mutual reservation of

rights while negotiations are concluded, where TSB will recover an aggregate of £192.6 million (2019: £192.6 million) under

the respective contracts.

As the parties have the legal right and intend to settle these amounts net, the amounts payable to Sabis under the MSA

and OSA contracts are presented on the statement of financial position net of the estimated recovery of £192.6 million

(2019: £192.6 million).

32. Notes to the consolidated cash flow statement

The table below presents the change in liabilities arising from financing activities.

Bank

Borrowings

from central

banks

£ million

Debt

securities in

issue

£ million

Subordinated

liabilities

£ million

Repurchase

agreements

£ million

Amounts due

from other

TSB Group

companies

£ million

Total

non customer

funding

£ million

At 1 January 2019 6,482.2 1,122.6 398.2 1,084.8 – 9,087.8

Repayment of borrowings from central banks (net) (1,995.0) – – – – (1,995.0)

Repayment of securitisation funding(1) – (177.5) – – – (177.5)

Issuance of covered bonds – 750.0 – – – 750.0

Repayments of repurchase agreements (net) – – – (1,084.8) – (1,084.8)

Exchange differences(1) (20.5) (20.5)

Non-cash movements (3.7) 1.7 (2.3) – – (4.3)

At 31 December 2019 4,483.5 1,676.3 395.9 – – 6,555.7


Repayment of securitisation funding – (440.2) – – – (440.2)

Issuance of senior unsecured debt securities – 450.0 – – – 450.0

Exchange differences 13.7 13.7

Non-cash movements (7.7) (0.6) (4.6) – – (12.9)

At 31 December 2020 3,065.8 1,699.2 391.3 – – 5,156.3 (1) In order to align with the current year presentation, exchange differences in 2019 have been presented separately.



32. Notes to the consolidated cash flow statement (continued)

Company

Borrowings

from central

banks

£ million

Debt

securities in

issue

£ million

Subordinated

liabilities

£ million

Repurchase

agreements

£ million

Amounts due

from other

TSB Group

companies

£ million

Total

non customer

funding

£ million

At 1 January 2019 6,482.2 498.4 398.2 1,084.8 189.6 8,653.2


Repayment of securitisation funding – – – – (179.2) (179.2)

Issuance of covered bonds – 750.0 – – – 750.0

Proceeds from repurchase agreements (net) – – – (1,084.8) – (1,084.8)

Non-cash movements (3.7) 1.4 (2.3) – – (4.6)

At 31 December 2019 4,483.5 1,249.8 395.9 10.4 6,139.6


Repayment of securitisation funding – – – – (10.4) (10.4)

Issuance of senior unsecured debt securities – 450.0 – – – 450.0

Non-cash movements (7.7) (0.6) (4.6) – – (12.9)

At 31 December 2020 3,065.8 1,699.2 391.3 – – 5,156.3

The following table presents further analysis of balances in the consolidated cash flow statement:


2020

£ million

2019(1)

£ million

2020

£ million

2019

Restated(1)

£ million

Increase in loans to central banks (24.8) (8.3) (24.8) (8.3)

Decrease/(increase) in loans to credit institutions 329.9 (2.6) – –

Increase in loans and advances to customers (2,402.4) (1,132.8) (2,402.4) (1,132.8)

Decrease/(increase) in reverse purchase agreements 201.1 (201.1) 201.1 (201.1)

Decrease in other advances 62.1 101.8 62.1 101.8

Net change in derivative financial instruments and fair value adjustment for

portfolio hedged risk(1) (216.0) (161.7) (201.5) (205.8)

(Increase)/decrease in other assets (25.4) 52.3 (68.6) 52.3

Increase/(decrease) in deposits from credit institutions 4.2 (2.7) 4.2 (2.8)

Increase in customer deposits 4,217.0 1,089.9 4,217.0 1,089.9

(Decrease)/increase in other financial liabilities (33.3) 13.6 (33.3) 13.6

Increase/(decrease) in provisions 101.3 (11.8) 101.3 (11.8)

Increase/(decrease) in other liabilities 41.9 (332.9) 41.9 (332.9)

Change in operating assets and liabilities(1) 2,255.6 (596.3) 1,897.0 (637.9)

Depreciation and amortisation 74.3 60.2 74.3 60.2

Impairment losses on loans and advances to customers 162.7 60.9 162.7 60.9

Exchange differences(2) 13.7 (20.5) – –

Other non-cash items(2)(3) 13.9 69.5 (29.7) 69.2

Non-cash and other items 264.6 170.1 207.3 190.3

Analysis of cash and cash equivalents as shown in the balance sheet

Cash 143.6 160.1 143.6 160.1

Balances with central banks 4,910.1 4,427.3 4,910.1 4,427.3

On demand deposits 2.6 5.4 2.6 5.4

Total cash and cash equivalents 5,056.3 4,592.8 5,056.3 4,592.8

(1) 2019 Company comparative amounts have been restated as described in note 33. (2) In order to align with the current year presentation, exchange differences, previously included in other non-cash items, have been presented separately. (3) Interest received on debt securities of £53.2 million in 2019 and interest paid on borrowings from central banks, debt securities in issue and subordinated liabilities

of £(94.0) million have been reclassified from investing activities and financing activities, respectively, and presented in other non-cash items.



33. Restatement – Company only

In respect of TSB’s securitisation programmes, in previous years, swaps between the Company and 3rd party swap

providers (and the associated back-to-back swaps between the 3rd party swap providers and the consolidated

securitisation entities) have been accounted in the Company financial statements as part of the deemed loan payable to

the securitisation entities. As such they were not recognised separately in the Company’s financial statements. In 2020, in

the period until September 2020, when the securitisation programmes ended, such swaps were recognised separately

from the deemed loan and, consequently, recognised as derivative financial instruments at fair value through profit or loss

on the balance sheet.

The effect of this change has been reflected in the Company financial statements, with prior period amounts restated,

where applicable, as shown in the table below. No restatement has been required to the Bank’s consolidated financial

statements.

At 31 December 2019 At 1 January 2019

Company

As presented

£ million

Restatement

£ million

Restated

£ million

As presented

£ million

Restatement

£ million

Restated

£ million

Assets

Derivative assets at fair value through profit or loss 111.5 14.7 126.2 88.4 - 88.4

Deferred tax assets 96.1 (4.0) 92.1 113.0 2.4 115.4

All other assets 38,911.5 - 38.911.5 40,503.1 - 40,503.1

Total assets 39,119.1 10.7 39,129.8 40,704.5 2.4 40,706.9

Liabilities

Derivative liabilities at fair value through profit or loss 127.9 - 127.9 93.1 9.0 102.1

All other liabilities 37,090.2 - 37,090.2 38,731.8 - 38,731.8

Total liabilities 37,218.1 - 37,218.1 38,824.9 9.0 38,833.9

Shareholder’s equity

Share capital 79.4 - 79.4 79.4 - 79.4

Share premium 195.6 - 195.6 195.6 - 195.6

Merger reserve 412.8 - 412.8 412.8 - 412.8

Retained profits 1,201.9 10.7 1,212.6 1,175.7 (6.6) 1,169.1

Valuation adjustments:

Fair value reserve

value reserve

13.6 - 13.6 18.6 - 18.6

Cash flow hedging reserve (2.3) - (2.3) (2.5) - (2.5)

Shareholder’s equity 1,901.0 10.7 1,911.7 1,879.6 (6.6) 1,873.0

Total shareholder’s equity and liabilities 39,119.1 10.7 39,129.8 40,704.5 (6.6) 40,706.9

34. Approval of the financial statements

These financial statements were approved by the Board of Directors on 2 February 2021.

The Company’s ultimate parent company and ultimate controlling party is Banco de Sabadell, S.A. (incorporated in Spain),

which is also the parent undertaking of the largest group of undertakings for which consolidated financial statements are

drawn up and of which Company is a member. TSB Banking Group plc is the Company’s immediate parent undertaking

and the parent undertaking of the smallest such group of undertakings for which consolidated financial statements are

drawn up and of which the Company is a member. Copies of the consolidated annual report and accounts of Banco de

Sabadell, S.A. are expected to be available in due course from www.grupbancsabadell.com/en/.

http://www.grupbancsabadell.com/en/


Independent auditor’s report to the members of TSB Bank plc

1. Our opinion is unmodified

We have audited the financial statements of TSB Bank plc (‘the Parent Company’) for the year ended 31 December 2020

which comprise the consolidated balance sheet, consolidated statement of comprehensive income, consolidated statement

of changes in equity, consolidated cash flow statement, Parent Company balance sheet, Parent Company statement of

changes in equity, Parent Company cash flow statement, and the related notes, including the accounting policies.

In our opinion:

• the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at

31 December 2020 and of the Group’s loss for the year then ended;

• the Group financial statements have been properly prepared in accordance with international accounting standards in

conformity with the requirements of the Companies Act 2006;

• the Parent Company financial statements have been properly prepared in accordance with international accounting

standards in conformity with the requirements of, and as applied in accordance with the provisions of, the Companies

Act 2006; and

• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as

regards the Group financial statements, Article 4 of the IAS Regulation to the extent applicable.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our

responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate

basis for our opinion. Our audit opinion is consistent with our report to the Audit Committee.

We were first appointed as auditor by the shareholders on 5 May 2020. The period of total uninterrupted engagement is

one year for the financial year ended 31 December 2020. We have fulfilled our ethical responsibilities under, and we

remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as

applied to public interest entities. No non-audit services prohibited by that standard were provided.

2. Key audit matters: our assessment of risks of material misstatement

Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the

financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud)

identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in

the audit; and directing the efforts of the engagement team. We summarise below the key audit matters, in decreasing

order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those

matters and, as required for public interest entities, our results from those procedures. These matters were addressed,

and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the

financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and

we do not provide a separate opinion on these matters.


Independent auditors’ report to the members of TSB Bank plc (continued) 2. Key audit matters: our assessment of risks of material misstatement (continued)

The risk Our response

Loan loss provisioning

31 December 2020:

£239.0 million

Refer to note 9

(accounting policy and

financial disclosures)

Subjective estimate

The measurement of expected credit losses (‘ECL’)

involves significant judgements and estimates. There is

increased risk of material misstatement of ECL in the

current year due to the increased judgement and

estimation uncertainty as a result of COVID-19.

The key areas where we identified greater levels of

judgement and therefore increased levels of audit focus in

the Group’s estimation of ECL are:

• Economic scenarios – IFRS 9 requires the Group to

measure ECL on a forward-looking basis reflecting a

range of future economic conditions. Significant

judgement is applied to determining the economic

scenarios used, particularly in the context of COVID-

19, and the probability weightings assigned to each

economic scenario.

• Qualitative adjustments – Adjustments to the

model-driven ECL results are raised by the Group to

address issues relating to model limitations, model

responsiveness or emerging trends relating to

COVID-19. They represent approximately 28.0% of

the total ECL. Certain adjustments are inherently

uncertain and significant judgement is involved in

estimating these amounts.

• Significant Increase in Credit Risk (‘SICR’) – The

criteria selected to identify a significant increase in

credit risk is a key area of judgement within the

Group’s ECL calculation as these criteria determine

whether a 12 month or lifetime provision is recorded.

Increased judgement exists in the current year

relating to the treatment of those customers who were

granted one or more COVID-19 payment reliefs.

• Model estimations – Inherently judgmental

modelling is used to estimate ECLs which involves

determining Probabilities of Default (‘PD’), Loss Given

Default (‘LGD’), and Exposures at Default (‘EAD’).

The LGD model used in the secured portfolio and the

PD models used in the unsecured portfolios are the

key drivers of the Group’s ECL results and are

therefore the most significant judgmental aspect of

the Group’s ECL modelling approach.

The effect of these matters is that, as part of our risk

assessment, we determined that the impairment of loans

to customers has a high degree of estimation uncertainty,

with a potential range of reasonable outcomes greater

than our materiality for the financial statements as a

whole, and possibly many times that amount. The

financial statements disclose the sensitivities estimated

by the Group (note 9).

Disclosure quality

The disclosures regarding the Group’s application of

IFRS 9 are key to explaining the key judgements and

material inputs to the IFRS 9 ECL results.

Our audit procedures included:

Recalculations: We recalculated the ECL

measured on each of TSB’s loan portfolios. We

performed sample testing over key inputs, data and

assumptions impacting ECL calculations to assess

the reasonableness of economic forecasts, weights,

and model assumptions applied.

Our economic scenario expertise: We involved

our own economic specialists to assist us in

assessing the appropriateness of the Group’s

methodology for determining the economic

scenarios used and the probability weightings

applied to them. We assessed the overall

reasonableness of the economic forecasts by

comparing the Group’s forecasts to our own

modelled forecasts. As part of this work we

challenged the reasonableness of the Group’s

considerations of the economic uncertainty relating

to COVID-19.

Qualitative adjustments: For each of the

significant adjustments to the model-driven ECL

results we assessed the reasonableness of the

adjustments by evaluating the key assumptions,

inspecting the calculation methodology and tracing

a sample of data used back to source data.

SICR: We assessed the ongoing effectiveness of

the SICR criteria and independently calculated the

loans’ stage for TSB’s loans and advances. In

addition, we assessed the reasonableness of the

Group’s treatment of COVID-19 payment relief

customers from a SICR perspective.

Our financial risk modelling expertise: We

involved our own financial risk modelling specialists

in evaluating the Group’s IFRS 9 models. We used

our knowledge of the Group and our experience of

the industry that the Group operates in to

independently challenge the appropriateness of the

Group’s IFRS 9 models.

Assessing transparency: We evaluated whether

the disclosures appropriately reflect and address

the uncertainty which exists when determining the

Group’s overall ECL. As a part of this, we assessed

the sensitivity analysis that is disclosed. In addition,

we challenged whether the disclosure of the key

judgments and assumptions made, including in

respect of COVID-19, was sufficiently clear.

Our results

The results of our testing were satisfactory, and we

considered the ECL charge and provision

recognised and the related disclosures to be

acceptable.




IT access, change

management and

operations

Data capture and integrity

The Group has self-acknowledged historical issues with

the design and implementation of controls within the

Group’s IT control environment, specifically in relation to

user access and change management.

During 2020 the Group has continued to work on

improving the IT control environment through their IT

remediation and stabilisation programmes. The GITCs

are a subset of IT controls within the wider IT control

environment.

The Group’s accounting and reporting processes are

dependent on automated controls (such as data feeds or

automated calculations) enabled by IT systems.

There is a risk that if the general IT controls (“GITCs”) are

not sufficient then inappropriate access could be gained

to IT applications and inappropriate changes made to the

application itself or to the integrity of related automated

controls.

In addition, GITCs which are not sufficient could also

affect the integrity of data stored on the IT systems and

the effectiveness of automated and manual

controls which use this data.

As part of our audit we have performed a risk assessment

of the GITC environment throughout 2020. Based on our

risk assessment we identified that remediation and

embedding of the GITCs was well progressed but not yet

complete and therefore concluded that we would not seek

to test the design or operating effectiveness of the GITCs

in 2020.

As a consequence and based on this risk assessment

procedure, we have instead focused on testing the

operation of certain automated controls and the accuracy

of the relevant data elements.


Risk assessment: We performed a risk

assessment of the GITC environment to assess

whether it was sufficient to support an approach

whereby we would test and place reliance on

certain automated controls. As part of this risk

assessment we inspected reports provided by the

Group of testing performed over the design,

implementation and operating effectiveness of

GITCs prepared by parties including external

consultants. Controls testing: Key aspects of our testing

involved:

- We performed walkthroughs to understand

the key financial reporting processes and the

related controls; and

We evaluated and placed reliance on selected

automated controls - including those which

support the calculation of fees and interest. As

we did not place reliance on GITCs we

increased the frequency with which we tested

the operation of these automated controls

during the period subject to audit. Tests of detail:

We used sample testing to agree relevant data

elements used in the financial reporting

process (including customer and transactional

data) to appropriate supporting evidence.

As we did not place reliance on the GITC

environment we increased our sample sizes for

this testing; and

- Where we performed substantive testing

over areas such as certain data feeds and data

calculations, we increased our sample sizes

because we did not place reliance on relevant

GITCs. Our results

We concluded from our risk assessment that

although the remediation and embedding

programme is not yet complete, the GITC control

framework was sufficient to allow us to test and

place reliance on certain automated controls. As we have not evaluated the design and operating

effectiveness of the GITCs, we have increased the

frequency with which we have tested the automated

controls throughout the period subject to audit and,

where appropriate, we have increased the sample

sizes we used to perform substantive testing.

We did not identify any significant deficiencies in

the automated controls or any material errors in the

relevant data elements which we tested.




Macro-economic

uncertainty

Refer to page 23 (Basis

of preparation)

Disclosure quality

Macro-economic events such as COVID-19 and Brexit

have had a significant economic impact on the UK

economy. In response, the UK government, and the

Bank of England, have announced measures such as

lowering the base rate and countercyclical regulatory

capital buffer. The eventual impact of COVID-19, Brexit

and the success of these measures remains uncertain.

This has given rise to a challenge across the industry

as banks have sought to factor the impact of this

macro-economic uncertainty into their forecasting and

key accounting judgements.

Through our risk assessment, we have focused our

audit on considering this uncertainty in the areas of

ECL provisions, forecasting and the Directors’

assessment of the appropriateness of the going

concern basis of preparation which takes account of

capital and liquidity.

The financial statements explain how the Directors

have incorporated the impact of macro-economic

uncertainty in their determination of ECL provisions and

the carrying value of the Parent Company’s investment

in subsidiary. Our response to both these matters is set

out in more detail in the relevant Key Audit Matter.

The financial statements also explain how the Directors

have formed a judgement that it is appropriate to adopt

the going concern basis of preparation for the Group

and Parent Company, with no material uncertainty

disclosed. This judgement takes into account all

relevant aspects including the impact of the macro-

economic environment.

The judgement is based on an evaluation of the

inherent risks to the Group’s and Parent Company’s

business model and how those risks might affect the

Group’s and Parent Company’s financial resources or

ability to continue operations over a period of at least a

year from the date of approval of the financial

statements.

The risk most likely to affect the Group’s and Parent

Company’s available financial resources over the

period is the ongoing economic uncertainty. This impact

could lead to reduced regulatory capital levels over the

course of the next 12 months.

In addition to the impacts on our ECL and investment in

subsidiary Key Audit Matters, the risk for our audit is

whether or not a material uncertainty exists that may

cast significant doubt on the ability of the Group and

Parent Company to continue as a going concern. Had

there been such an uncertainty, then that fact would

need to be disclosed.

We considered whether the risks posed by macro-

economic uncertainty could plausibly affect the

liquidity and capital in the going concern period by

assessing the directors’ sensitivities over the level of

available financial resources indicated by the Group’s

financial forecasts taking account of severe, but

plausible, adverse effects that could arise from these

risks individually and collectively.


Our sector experience: We considered the directors’

assessment of sources of risk for the Group’s and

Parent Company’s business and financial resources

compared with our own understanding of the risks.

We considered the directors’ plans to take action to

mitigate the risks.

Challenge of assumptions: We inspected the

Group's and Parent Company’s forecasting, capital

and liquidity plans to identify the key assumptions

within these. We challenged the reasonableness of

assumptions underpinning the Group’s and Parent

Company’s forecasts.

Sensitivity analysis: We challenged the severity of

the stressed scenarios used by the Group and Parent

Company in their capital and liquidity assessments

and the viability of possible management actions that

might be required in the event of such stresses

materialising.

Assessing transparency: We critically assessed the

completeness and accuracy of the matters covered in

the going concern disclosure within the financial

statements using our knowledge of the relevant facts

and circumstances developed during our audit work,

considering the economic outlook, key areas of

estimation uncertainty, and mitigating actions

available to the Group and Parent Company to

respond to these risks.

Our results

We found the going concern disclosure without any

material uncertainty to be acceptable.


Independent auditors’ report to the members of TSB Bank plc (continued) 3. Our application of materiality and an overview of the scope of our audit

Materiality for the financial statements as a whole was set at £7.5 million, determined with reference to a benchmark of

total revenue, of which it represents 0.81%. We consider total revenue to be the most appropriate benchmark as it provides

a more stable measure year on year than group loss before tax.

Materiality for the Parent Company financial statements as a whole was set at £7.5 million, determined with reference to a

benchmark of total revenue, of which it represents 0.81%. We consider total revenue to be the most appropriate benchmark

as it provides a more stable measure year on year than group loss before tax

In line with our audit methodology, our procedures on individual account balances and disclosures were performed to a

lower threshold, performance materiality, so as to reduce to an acceptable level the risk that individually immaterial

misstatements in individual account balances add up to a material amount across the financial statements as a whole .

Performance materiality for the Group and Parent Company was set at 65% of materiality for the financial statements as

a whole, which equates to £4.88 million. We applied this percentage in our determination of performance materiality

reflecting that this is our first year as auditors of the Group and Parent Company and we have not tested general IT controls.

We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £0.375

million, in addition to other identified misstatements that warranted reporting on qualitative grounds.

The Group team performed the audit of the Group as if it was a single aggregated set of financial information. The audit

was performed using the materiality and performance materiality levels set out above.

4. Going concern

The directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the

Group or the Parent Company or to cease their operations, and as they have concluded that the Group’s and the Parent

Company’s financial position means that this is realistic. They have also concluded that there are no material uncertainties

that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of

approval of the financial statements (‘the going concern period’).

An explanation of how we evaluated management’s assessment of going concern is set out in the key audit matter in

relation to macro-economic uncertainty in section 2 of this report.

Our conclusions based on this work:

• we consider that the directors’ use of the going concern basis of accounting in the preparation of the financial

statements is appropriate;

• we have not identified, and concur with the directors’ assessment that there is not, a material uncertainty related to

events or conditions that, individually or collectively, may cast significant doubt on the Group’s or Parent Company's

ability to continue as a going concern for the going concern period; and

• we found the going concern disclosure on page 23 (Basis of preparation) to be acceptable.

However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are

inconsistent with judgements that were reasonable at the time they were made, the above conclusions are not a guarantee

that the Group or the Parent Company will continue in operation.

5. Fraud and breaches of laws and regulations – ability to detect

Identifying and responding to risks of material misstatement due to fraud

To identify risks of material misstatement due to fraud (‘fraud risks’) we assessed events or conditions that could indicate

an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment procedures

included:

• Enquiring of directors, Internal Audit and inspection of policy documentation as to the Group and Parent Company’s

high-level policies and procedures to prevent and detect fraud, including the Internal Audit function, and the Group

and Parent Company’s channel for ‘whistleblowing’, as well as whether they have knowledge of any actual, suspected

or alleged fraud.

• Reading Board, Board Audit Committee and Risk Committee minutes.

• Considering remuneration incentive schemes and performance targets for management and directors.

• Using analytical procedures to identify any unusual or unexpected relationships.

• Using our own forensic specialists to assist us in identifying fraud risks based on discussions of the circumstances of

the Group and Parent Company.


Independent auditors’ report to the members of TSB Bank plc (continued) 5. Fraud and breaches of laws and regulations – ability to detect (continued)

Identifying and responding to risks of material misstatement due to fraud (continued)

We communicated identified fraud risks throughout the audit team and remained alert to any indications of fraud throughout

the audit.

As required by auditing standards, and taking into account possible pressures to meet profit targets and our overall

knowledge of the control environment, we perform procedures to address the risk of management override of controls, in

particular the risk that Group management may be in a position to make inappropriate accounting entries and the risk of

bias in accounting estimates and judgements such as loan loss provisioning. On this audit we do not believe there is a

fraud risk related to revenue recognition because there is limited complexity in the calculation and recognition of revenue.

We also identified a fraud risk related to estimation of loan loss provisioning, specifically relating to economic scenarios

and qualitative adjustments in response to significant estimation that involves subjective judgments or uncertainties that

are difficult to corroborate. Further detail in respect of loan loss provisioning is set out in the key audit matter disclosures

in section 2 of this report.

We also performed procedures including:

• Identifying journal entries to test based on risk criteria and comparing the identified entries to supporting

documentation. These included those posted by senior finance management and those posted and approved by the

same user.

• Assessing significant accounting estimates for bias.

We discussed with the Audit Committee matters related to actual or suspected fraud, for which disclosure is not

necessary, and considered any implications for our audit.

Identifying and responding to risks of material misstatement due to non-compliance with laws and regulations

We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial

statements from our general commercial and sector experience, through discussion with the directors and other

management (as required by auditing standards), and from inspection of the Group’s regulatory and legal correspondence

and discussed with the directors and other management the policies and procedures regarding compliance with laws and

regulations.

As the Group is regulated, our assessment of risks involved gaining an understanding of the control environment including

the entity’s procedures for complying with regulatory requirements.

We communicated identified laws and regulations throughout our team and remained alert to any indications of non-

compliance throughout the audit.

The potential effect of these laws and regulations on the financial statements varies considerably.

Firstly, the Group is subject to laws and regulations that directly affect the financial statements including financial reporting

legislation (including related companies legislation), distributable profits legislation and taxation legislation and we

assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial

statement items.

Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have

a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or

litigation or the loss of the Group’s and Parent Company’s licence to operate. We identified the following areas as those

most likely to have such an effect: specific areas of regulatory capital and liquidity, conduct, money laundering and financial

crime and certain aspects of company legislation recognising the financial and regulated nature of the Group’s and Parent

Company’s activities. Auditing standards limit the required audit procedures to identify non-compliance with these laws

and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence,

if any. Therefore if a breach of operational regulations is not disclosed to us or evident from relevant correspondence, an

audit will not detect that breach.

For the customer redress matter discussed in note 30, our procedures included inquiries of internal counsel and inspection

of correspondence with the regulator.

For the joint regulatory investigation matter discussed in note 24, our procedures included inquiries with internal and

external legal counsel as to the status of the investigation.


Independent auditors’ report to the members of TSB Bank plc (continued) 5. Fraud and breaches of laws and regulations – ability to detect (continued)

Identifying and responding to risks of material misstatement due to non-compliance with laws and regulations (continued)

Within note 9, management has disclosed the potential future risks relating to the applicability of the government guarantee

over losses arising on the government bounce back loan scheme. We have compared the disclosure against our own

understanding of the nature and rules of the scheme and have concluded it is appropriate

We discussed with the Directors matters related to actual or suspected breaches of laws or regulations, for which disclosure

is not necessary, and considered any implications for our audit.

Context of the ability of the audit to detect fraud or breaches of law or regulation

Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material

misstatements in the financial statements, even though we have properly planned and performed our audit in accordance

with auditing standards. For example, the further removed non-compliance with laws and regulations is from the events

and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing

standards would identify it.

In addition, as with any audit, there remained a higher risk of non-detection of fraud, as these may involve collusion, forgery,

intentional omissions, misrepresentations, or the override of internal controls. Our audit procedures are designed to detect

material misstatement. We are not responsible for preventing non-compliance or fraud and cannot be expected to detect

non-compliance with all laws and regulations.

6. We have nothing to report on the strategic report and the directors’ report

The directors are responsible for the strategic report and the directors’ report. Our opinion on the financial statements

does not cover those reports and we do not express an audit opinion thereon.

Our responsibility is to read the strategic report and the directors’ report and, in doing so, consider whether, based on our

financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements

or our audit knowledge. Based solely on that work:

• we have not identified material misstatements in those reports;

• in our opinion the information given in the strategic report and the directors’ report for the financial year is consistent

with the financial statements; and

• in our opinion those reports have been prepared in accordance with the Companies Act 2006.

7. We have nothing to report on the other matters on which we are required to report by exception

Under the Companies Act 2006, we are required to report to you if, in our opinion:

• adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not

been received from branches not visited by us; or

• the Parent Company financial statements are not in agreement with the accounting records and returns; or

• certain disclosures of directors’ remuneration specified by law are not made; or

• we have not received all the information and explanations we require for our audit.

We have nothing to report in these respects.


Independent auditors’ report to the members of TSB Bank plc (continued) 8. Respective responsibilities

Directors’ responsibilities

As explained more fully in their statement set out on page 22, the directors are responsible for: the preparation of the

financial statements including being satisfied that they give a true and fair view; such internal control as they determine is

necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud

or error; assessing the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable,

matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate

the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material

misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a

high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect

a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if,

individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the

basis of the financial statements.

A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.

9. The purpose of our audit work and to whom we owe our responsibilities

This report is made solely to the Parent Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the

Companies Act 2006. Our audit work has been undertaken so that we might state to the Parent Company’s members

those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent

permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent

Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.

Pamela McIntyre (Senior Statutory Auditor)

for and on behalf of KPMG LLP, Statutory Auditor

Chartered Accountants

15 Canada Square

London

E14 5GL

2 February 2021

http://www.frc.org.uk/auditorsresponsibilities


Contacts For further information please contact:

Media

George Gordon

Communications and Corporate Affairs Director

Phone: +44 (0)207 003 9369

Email: [email protected]

Supreet Thomas

Head of Communications

Mobile: +44 (0)7519 502123

Email: [email protected]

Investors and analysts [email protected]

mailto:[email protected]



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